April 2020 experienced a strong re-emergence of liquidity and strength in many risk markets while the economic and social shutdown continued in the era of “Covid-19”. The positive market tone was primarily a continuation of late March’s rebound, due to broad support from the US Government and the Federal Reserve.
In addition to fiscal and monetary stimulus, optimism was driven by the virus curve beginning to flatten in hard-hit areas, promises of realistic viral treatments emerging, and parts of the US economy beginning to lay out plans for “re-opening”. While these green-shoots continue, risks still remain in the social and economic landscape around the world, which was made very apparent in the oil market collapse during the month of April.
Bond market bid/ask spreads tightened in most sectors during the month of April.
- Treasuries rallied as the yield curve flattened (longer duration securities outperformed shorter).
- Corporate bonds had outstanding performance as risk premium spreads narrowed after March’s epic increase.
- Despite a vast amount of liquidity being fostered into bond and credit markets, the municipal bond market had more hurdles to jump.
- High yield and emerging market bonds also jumped in price.
As Federal Reserve bond programs were quickly put in place, investment themes similar to those of the quantitative easing periods of the financial crisis, quickly ensued. Performance in the credit market was especially prominent, as the supply of primary issuance grew exponentially. Large global companies issued debt to strengthen their balance sheets with cash. Investors with large amounts of liquidity, receiving near zero on their cash holdings, were eager to buy yield.
Cash returns are anchored near zero and will likely remain at extreme lows for an extended period of time. Investment parameters may start to shift further out the risk curve to increase yield and return.
Stock markets recorded their best monthly performance since 1987, as the S&P 500 Index rose 12.82%. Volatile trading days carried over from March, but prices rose in all sectors in anticipation of an “economic re-start”. Broad risk-taking and short covering were evident as Q1-2020 earnings season delivered mixed messages. Dividend stocks performed well, despite a fear of firms slashing payments. Growth and value sectors rallied, along with small-cap companies. Energy sector stocks boasted 30% returns despite the fall in oil prices, which may end up being April 2020’s historic footnote.
April 20th was considered the perfect storm for the oil market. WTI futures contracts for May recorded negative prices as volatility rose 400%. It was a grim reminder of what can occur in a speculative market when supply and demand are tested. Despite attempts to lower production by various oil-producing entities, the virus led economic slowdown brought demand to a standstill as storage tanks reached capacity.
Economic data confirmed the broad challenges of the economic halt. Job losses continued to mount while manufacturing, retail sales, and consumer sentiment all plunged. While there were some bright spots (versus economic predictions) in areas such as existing home sales and durable goods orders, the initial report on Q1-2020 GDP was a contraction of -4.8%. Inflation data was mixed suggesting a deflationary environment in some sectors, while an up-tick in others.
Bond market participants and asset allocators are carefully watching inflation data. While the near term seems to be dis-inflationary, the massive amounts of stimulus could eventually cause large spikes in inflationary pressures. This will have broad implications for the US dollar and all assets classes, particularly the long end of the yield curve and TIPs valuations. The market has a keen eye on the prices of real assets (gold/silver) which typically serve as stores of value during inflationary episodes.
The Federal Reserve met at the end of April warning of the economic outlook. They took a bold position that they would do “whatever it takes, for as long as it takes” to support the economy. Chairman Powell discussed the need for a continued fiscal response to the dire economic backdrop. The Fed also extended the paycheck protection program, expanded the state and local government relief program, and expanded its scope to main street loan programs. Powell reiterated that now is not a time to be concerned with the level of Federal debt. The FOMC stated they would be steadfast in utilizing all the tools at their disposal to return the economy to its “pre-corona virus crisis” state.
April was highly political as geopolitical headlines filtered through the markets. Former Vice-President Biden became the leading Democratic presidential candidate, and virus related issues became political warfare for all politicians. US-China tariff warnings re-emerged as a topic for the current administration as the blame for the handling of the initial virus response was passed around. On April 15th, rumors began to emerge over the disappearance of North Korea leader King Jong-Un causing a reaction in the markets as some believed the possibility of his death during surgery.
Please reach out to the Piton team at 646-518-2800 to discuss current markets, review portfolios and determine how to best meet your fixed income needs.