June 2020 Monthly Review - Fed Fueled Second Quarter, while Virus Resurgence Dims the Start to Summer
The second quarter of 2020 will be remembered for one of the biggest quarterly rebounds on record, and the best risk market performance in over a decade (the S&P 500 Index was +18%).
The main catalysts were the re-opening of the economy, the potential for coronavirus vaccines, and the Fed pumping liquidity into the financial system. The month of June had some of the same tones but was marred by Covid-19 cases rising in some key parts of the United States.
As stock markets saw volatility reemerge during several June trading days, the bond market moved towards slightly lower rates which was most pronounced in shorter maturities. Corporate debt performed the best lead by lower quality bonds.
The FOMC has been the main driver of the upward trajectory in total return for fixed income. While government bonds, securitized debt, municipal bonds have all seen prices rise due to demand for yield, corporate debt was the largest beneficiary in June.
On June 10th, Chairman Powell suggested that the Fed would not raise rates until 2022. This drove investors out of cash and into intermediate maturities. Five days later, the FOMC announced the commencement of buying programs in the secondary corporate bond market. As a result of the announcement, risk premium spreads fell sharply while corporate bond inventories and new issues saw continued robust demand. In late June, the Fed opened the Primary Market Corporate Credit Facility (PMCCF) signaling they would begin buying new issue corporate bonds, not just ETF’s. The old saying of “Don’t fight the Fed”, was back with a vengeance.
While Federal Reserve Governors have remained focused on liquidity measures, the future path of Fed policy became more two-sided in June. Fed speakers have had mixed opinions on the potential of utilizing a negative rate policy. Many have mentioned yield curve control by the FOMC as a possible future measure, and many economists believe this may begin this fall. On June 23rd, Fed Governor Bullard came out with the first hawkish Fed comment in some time, stating that the economy has snapped back much faster than the FOMC thought and he was not in favor of the FOMC controlling short-term rates.
In early July, the National Bureau of Economic Research stated the recession began in February. Much of the positive economic data during the month of May suggested the “V” shaped recovery was beginning. May Non-Farm payroll figures began the month with a jolt as expectations for the release were largely negative, but payrolls actually rebounded by +2,509,000. This coincided with the re-opening of large U.S. cities, including New York on June 8th. Manufacturing data, mortgage applications, retail sales numbers, auto sales, new home sales, and consumer confidence all beat economist expectations throughout the month.
Unfortunately, data points related to the Covid-19 pandemic were not as positive during the month as the states that had been early to reopen; Texas, Florida, the Carolinas, Arizona, and California all saw a resurgence in cases. On June 11th, markets revisited the large downward swings as the S&P 500 Index lost 5.89% in a day. This reminded market participants of the price action of March as many feared the extension of “stay-at-home” orders yet again sweeping across the nation. Treasury Secretary Mnuchin stated that the U.S. could not shut down again, even if the number of coronavirus cases began to rise.
Fiscal policy and politics also played a role in June. On June 16th President Trump announced a trillion-dollar infrastructure plan. A week later, markets fell as White House trade advisor, Peter Navarro, was quoted saying the China trade deal was “over”. President Trump responded and reassured markets that the China trade deal was still intact.
As June closed, equity and fixed income markets both closed with slightly positive returns. Even with virus fears and the large social divide still fuming across the country, investors needed to find yield as the realization that cash rates and deposits will be close to zero for a very long time.
The Piton team continues to focus on constructing quality portfolios that will perform over the long-term with a lower standard deviation than comparable funds, ETF’s and fixed income strategies. As both equity and fixed income markets recorded a substantial reversal from the dismal first quarter, risk markets are now priced to very easy Fed policy and the Fed’s vast array of liquidity tools. Challenges will continue to unfold as the economy continues to battle the impacts of the ongoing health pandemic and as the market begins to interpret Q2 earnings. As we move closer and closer to the US election in November, we continue to believe that diversification in fixed income is important to have in the face of so much uncertainty.