Vice President, Trading and Fixed Income Portfolio Management
“In the long run, and even in the medium run, you wouldn't want to bet against the American economy." – Federal Reserve Chair Jerome Powell, May 17, 2020
All 50 states have now taken steps to re-open according to the Wall Street Journal. While still devastating in magnitude, many high-frequency and leading economic indicators may be past their “worst-ever” levels, showing slight improvement from their recent and historic lows. Along with a hopeful press release on vaccine development, this week was marked by policymakers reiterating and expanding upon their previous commitments to devote their full resources to the recovery effort. Overall, financial markets responded favorably to all the above trends.
Federal Reserve Chair Jerome Powell used a 60 Minutes interview last Sunday to not only reiterate the multitude of support programs already enacted by the central bank, but also to suggest a high probability of additional monetary stimulus. This would likely include additional asset purchases held on their balance sheet as well as stronger forward guidance on interest rates. Importantly, the use of negative interest rates is not in their current playbook and Chair Powell has made it clear how their implementation can be damaging to bank lending, money-market funds and other critical elements of our financial “plumbing.” We agree that negative rates do not work, as we have seen in Europe and Japan.
It is likely no coincidence that this year’s 33 percent selloff in the S&P 500 Index ended on March 23, the same day that the Federal Reserve announced its corporate credit support facilities. While our central bank may sometimes appear to have limited direct impact on Main Street, these support measures made an immediate and positive impact on credit availability, ensuring corporations could access funding through the capital markets. While many aspects of these programs are still being implemented, the announcement effect was significant and greatly boosted the confidence of all market participants. As a result, we are on pace for a record year of investment-grade corporate bond issuance as companies issue debt and secure liquidity as a bulwark against the present economic uncertainty. Investors have been very receptive to this issuance as well.
Source: FactSet
While the Federal Reserve is providing the “safety net” for well-functioning financial markets, the success of the state-by-state re-openings will help determine the upward slope of our projected checkmark shaped recovery (see chart above). Congress and the Treasury Department have already delivered the CARES Act and Payroll Protection Program and there is growing support for an additional round of fiscal stimulus that could arrive this summer and include support for state and local governments.
As we navigate this global health crisis, financial markets are continually looking ahead and pricing in all known information. It is encouraging to see recent trends in credit spreads, a sharp rebound in the municipal bond market and some economic survey data all point to various degrees of recovery. While we wait for positive developments on the vaccine front, we hope the “all-of-the-above” policy approach coupled with the return of animal spirits will moderate not only the depth of the downturn, but its duration as well.
Week in Review and Our Takeaways
The Federal Reserve announced yesterday they had purchased $1.8 billion of corporate bond ETFs in the first six days of its Secondary Market Corporate Credit Facility
The S&P 500 Index rose 3.1 percent for the week and is up 35 percent from its low on March 23
This week, the U.S. Treasury Department conducted their first 20-year bond auction since 1986