Rates Stabilize Due To Stimulus – Fixed Income Update

The Fed pledged its continued support for the economy in the form of fixed income purchases including government bonds, mortgages, and various ETFs. The Fed also began buying corporate bonds in the open market, as well as continuing to buy unlimited amounts of U.S. government bonds and mortgage-backed securities. Lending facilities were also extended to corporations and municipalities helping to support the corporate and municipal bond markets. An increase in the money supply, as measured by M2, rose to over $17.2 trillion as of April 20th, up from $15.5 trillion on February 24, 2020. The rapid increase is a result of the massive fiscal and monetary stimulus infused in order to stem the effects of the pandemic – this stimulus will have a profoundly positive economic outcome.

Both short-term and long-term yields have fallen as substantial stimulus efforts have buoyed the bond markets. The yield on the 10-year Treasury bond ended April at 0.64%, with the yield on the 2-year Treasury ending the month at 0.20%.

Earnings Are Focus For Equities – Stock Market Review

Equities rebounded in April, recapturing some of the losses suffered in March. Stocks were enhanced by reopening prospects and stimulus efforts targeting businesses. All eleven sectors composing the S&P 500 Index experienced an improvement in April, a strong reversal relative to March. Health Care, Technology, and Consumer Staples were among the top performing sectors for the month. My expectation is for another period of stock weakness, followed by continued and durable longer-term progress.   The defensive cash we raised (pre-corona) will be thoughtfully redeployed to exploit these excellent future opportunities.

Earnings dominated equity markets as corporate earnings have become a barometer of the impact that the pandemic is having on the economy. Some analysts can’t explain the discrepancy between the economy and the stock market, with equities propelling higher in April as dismal economic data points to subdued growth.  In my experience, the stock market is a discounting mechanism, as such, it’s looking beyond today,  to a more favorable economic environment in 6-9 months.

Oil Prices Dropped In April – Oil Industry Update

Oil’s plunge in April was of historic proportion, falling below $0 per barrel for the first time ever in history.  Frankly, much of that occurrence was associated with a short-term trading anomaly and as usual, was overhyped by the media.   The collapse in U.S. oil prices, as tracked by WTI, fell as storage for crude oil became nearly completely unavailable worldwide.  Storage for crude oil has become increasingly scarce as the virus outbreak has led to a growing supply amid falling global demand, thus creating a glut of oil with minimal potential buyers.   On a positive note, the economy will have a boost with the price of gasoline expected to drop to new lows as the price of crude oil (WTI) fell below $10 per barrel in April. Lower crude oil prices have historically led to lower gasoline prices nationwide – which are a tremendous economic tailwind and cost-saving for consumers and businesses alike.  But let’s focus on renewables.

How The Housing Market Is Being Affected – Housing Update

A drop in mortgage rates to near historic lows has not been enough to offset a decline in demand for home buyers. The ongoing travel and socialization restrictions are inhibiting would be home shoppers from viewing and buying properties. Of the various factors influencing the housing market, employment is the most significant. No matter how low mortgage rates are, if someone is unemployed, they won’t be able to make a mortgage payment at all. Historically, rising unemployment rates have been detrimental to the housing market. The last housing contraction, as measured by the Federal Reserve’s House Price Index, occurred in 2008 and 2009, when unemployment peaked at 10% in October 2009. Some economists believe that an extended period of elevated unemployment will negatively impact the housing market.

In addition, the onset of forbearance allowance for homeowners as enacted by the CARES Act has put lenders in precarious positions. The Federal Housing Finance Agency estimates that there were roughly one million mortgages in forbearance at the end of April, representing 7% of government held mortgages by the agency. Lenders are sensitive to a deteriorating economic environment that may lead to additional foreclosures and bankruptcies – as such, today they are proactively working with borrowers – unlike the 2008/09 period.

How Inflation May Eventually Return – Consumer Sentiment

The enormous monetary and fiscal stimulus actions launched by the Federal Reserve and Congress entail billions of dollars in newly issued government debt, thus potentially driving down the value of the U.S. dollar. When countries issue and carry additional debt, the value of their currency tends to devalue relative to other currencies, thus making imports more expensive. Ironically, a weaker U.S. dollar also makes the U.S. more competitive as U.S. exports become less expensive worldwide. The FDA also reported that the recent closures of several large meat plants will not necessarily lead to shortages, but may result in fewer options for less expensive products. The International Monetary Fund (IMF) estimates inflation for countries worldwide based on various factors. The IMF projects that inflation in the United States will increase through the remainder of the year and again in 2021 to 2.4%.

Two macro economic occurrences signal a probable rise in inflation. The first is the rapid increase in the U.S. Money Supply, also known as M2, which includes money market funds, checking deposits, and actual cash. Historically, an increase in the M2 has led to inflationary pressures in some instances. The second occurrence is the potential unwinding of globalization with a renewed focus on domestic production. Globalization is now in danger of retracting, as trade fears among countries has heightened due to the extensive exposure of the virus worldwide. Heightened tensions between the United States and China have also created the notion that a decrease in low-cost Chinese made imports may materialize. (Sources: FDA, U.S. Dept. of Agriculture, International Monetary Fund)