This is a tough time in the investment world. Make no mistake about it. We are faced with the coronavirus pandemic, the upcoming national elections, massive protests, the government’s ever increasing budget deficit, record low yields, and the Fed’s massive addition to its balance sheet as it explores new areas, not entered before.
While the equity markets are well off their March lows, we still haven’t regained the levels of the first of the year, except for the NASDAQ.
INDEX YTD CHANGE
S&P 500 -4.12%
The American bond markets are also performing in an interesting fashion. Some have done better than the DJIA and the S&P 500, as rates have plummeted and compression has taken place in the risk assets. Decent yields are increasingly difficult to find which have had a major negative impact on seniors, retirees, pension funds, university endowment funds, mortgage companies, banks, and other investors that depend on an income stream to support their lifestyles and businesses.
INDEX YTD CHANGE
U.S. TREASURIES +8.31%
IG CORPORATES +4.98%
HIGH YIELD -2.30%
MUNICIPAL BONDS +1.88%
*All equity and bond data provided by Bloomberg.
If one finger can be pointed at what is driving the markets now, it is the central banks, in my opinion. The total assets of the world’s major central banks now stand at $24.3 trillion, at the end of May. Just in May alone their total assets increased by $5 trillion, as they lined up with new and innovative programs to support their governments. In the United States, the Fed has gone on a buying spree both vertically and horizontally. It isn’t just more money but money now in ETFs, Corporate bonds, High Yield bonds and more innovation may be coming.
While the Swiss central bank and the Japanese central bank are both buyers of equities, and while the Fed would probably need Congressional approval to enter this space, it is an open question, in my view, whether the Fed might begin some program here. Certainly, their expansion into the risk markets has changed the playing field as we find ourselves in a “Borrower’s Paradise” and a “Fixed Income Investor’s Hell.”
All time low yields, across the spectrum, have caused corporate borrowers to enter the markets in record numbers. They have also caused record low mortgage rates, as homeowners scramble to refinance their residences. The Fed, make no mistake, has also caused the debt of the U.S. government to be financed at record low yields, as Congress and the Administration charge on with economic stimulation to offset the economic consequences of the coronavirus pandemic.
One mandate of the Federal Reserve has been to prioritize the goal of maximum employment. This task for the Fed is incredibly daunting now. Last week an additional 1.5 million Americans filed for unemployment benefits even though there have been signs and sources touting that the economy has been improving.
For the week ending on June 6, the number of Americans receiving unemployment benefits was 20.5 million individuals. That calculates to an unemployment rate of 14.1%. The Fed is on record forecasting that the unemployment rate will go down to 9.3% by the end of 2020. Although that is roughly 1/3 lower than the current rate, it is well above the former rate of just 3.5% recorded in February.
The U.S. economic recovery from the novel coronavirus epidemic is set to be challenging and there will be no quick fix. We will make our way back from this, but it will take time and work … The path ahead is likely to be challenging. Lives and livelihoods have been lost, and uncertainty looms large.
– Fed Chairman, Jerome Powell
I continue to recommend, as I have since the first of the year, locking up some profits when applicable. Both the bond and equity markets are tenuous and while I think that the fixed-income markets are going to continue to be supported by the Fed, there could be uncomfortable swings in both markets. This could be especially true in equities, in my estimation, as the Barbarians could storm the gates, from a number of different fronts.
“Preservation of Capital” are still the first through tenth of Grant’s Rules as I have learned, through the years, that making money is far more difficult than keeping money. “Caution” continues to be my byword as the markets are assuaged by political, medical, and economic events. We are dancing on the head of a pin. Keep dancing but watch your step!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Source: Seeking Alpha