Curve Curbed

Curve curbed.  Stocks rallied yesterday as investors cheered what appeared to be early signs of a slowdown in hotspot deaths. Spain and Italy, once at the center of the European outbreak, appear to be flattening while small signs of hope are emerging in New York.

 

N O T E W O R T H Y

 

Pent up positivity.  Most of us have done it.  We try not to obsess with the torrent of scary news reports which have invaded almost every aspect of our digital lives.  But alas, we can’t avoid just having a quick peek, to stay in the know.  With that we sift through the headlines for something positive, which has been no easy task, and usually ends up a fruitless venture.  Many experts agree that we are, in fact, approaching the eye of the storm of the pandemic.  The President and his team have warned that this upcoming week will be a tough one for the country.  All of this scary news and the mounting pile of unknowns have been the source of the high level volatility in risk assets.  Risk assets don’t only include stocks but also corporate bonds and commodities.  Stocks, being at the front and center, get a lot of attention as they are broadly held by institutional and retail investors alike.  They are also simple to understand.  If a company does well, its stock, in theory should increase in value.  Bonds are a bit different and more likely to be found in institutional portfolios. That has not always been the case however.  Going back to when I started in the biz some 30 years ago it was quite common for folks of all ages to own bonds in their portfolios.  During that period of time, the country was just entering a recession and 10-year treasuries would yield around 8%.  You read that correctly… 8% for what is considered the safest credit risk on the plant.  If you wanted to take a little more risk, you could buy a corporate bond which would pay you a premium for taking the additional credit risk.  A Baa-rated corporate bond at that time would have paid you an additional +3% above treasuries… that’s almost 11% if you did the math.  Too much risk for you?  You could buy an Aaa-rated, that’s Moody’s top rating, with only a slightly lower yield of around 9%.  Wow, imagine that. Of course, those were different times.  Thirty-year mortgages were north of 10% after spending much of the early 80’s in the teens.  Stocks had some good years during that time as well.   The S&P500 was up +27.25% in 1989 after climbing +12.4% in the prior year.  In 1990, the US entered a recession and the market ended the year down by -6.56%.  Markets were very volatile that year with the newly formed VIX index spending much of the year in the 20-30 range. Of course, there was no pandemic in 1990, but Crude Oil was very much a factor back then as now. Oil prices spiked from around $15 a barrel to over $40 a barrel, playing a big role in pushing the country into a recession.  Fed funds were lowered from around 8% to 5% to help spur the economy forward… and that it did. Crude oil prices fell back to the $20 dollar range, consumers regained confidence, and the country emerged from the recession.  A lot has happened since those days.  Ten-year treasury yields steadily declined as did the Fed Funds rate.  Lower yields on bonds made them less attractive to retail investors who began to favor the potential upside in stocks.  Bonds can’t be avoided by institutions who are required to hold them for a number of reasons.  They too struggle to find yield and usually find it in lower quality corporate bonds.  Because of their exposure to economic risk, high yield bonds tend to trade more like stocks than bonds as investors sell them when things get bad and buy them when things are looking up. This can be followed by observing spreads.  When they expand, investors are running from risk and when they contract investors are seeking it.   Between 2010 and 2016, spreads for Baa-rated corporates were roughly around +3% similar to 1990, but 10-year treasuries hovered around their historic lows of roughly 2%.  In the wake of the the 2016 elections, money piled into risk assets like stocks… and higher yielding bonds.  Stocks rallied and bond spreads… you guessed it… contracted.  Because of the low treasury yield, Baa-rated bond yields were at levels not seen since the 1950s.  When the Coronavirus crisis began to infect the markets in February, stocks were not the only instruments that were affected.  Corporate bond demand waned causing spreads to expand to levels not seen since the financial crisis.  Now, for the bit of good news, albeit small. Yesterday we finally got those somewhat positive headlines when we learned that Italy and Spain have perhaps seen a peak in virus confirmations and deaths. Here in New York, though it is too early to tell, there are some signs that new daily deaths from the virus may be slowing.  Good news, which will hopefully continue.  In the stock markets, the VIX index came down an additional -3.33%  after falling for the 2 prior sessions.  This means the volatility that gave us all sea sickness back in March may be subsiding.  Good news. Corporate bond spreads have come in slightly indicating that appetite for risk is increasing somewhat.  Also… good news. These are small green chutes and in no way indicators that we are through the pain yet, but it is occasionally nice to see some positives in the midst of stormy weather.  Remember that recession back in 1990?  The year after it ended stocks rallied by +26.31%.  Let’s hope the trend of positive news continues for not only the health and wellbeing of our families, friends, and coworkers, but also our 401k’s.

 

 

THE MARKETS

 

Stocks rallied yesterday as hopes that the virus curve may be flattening gave investors reason to applause.  The S&P500 climbed by +7.03%,  the Dow Jones Industrial Average jumped by +7.73%, the Russell 2000 surged by +8.24%, and the NASDAQ Composite Index advanced by +7.33%.  Bonds pulled back and 10-year treasury yields climbed by +7 basis points to 0.66%.  Crude oil spilled by -7.97% as OPEC+ talks were postponed until Thursday.

 

NXT UP

 

– JOLTS Job Openings may have fallen to 6.5 million in February from 6.923 million in January.

– The Treasury will auction $25 billion 10-year notes today.

– Congressional leaders are reportedly working with the Administration on the next stimulus bill which may add an additional +$1 trillion dollars.

Look for news on that front today.

daily chartbook 2020-04-07