Market Commentary

One Month In: Tracking The Fed and Earnings Season

This week marks one month of when most companies began to work from home to stem the spread of the coronavirus – so far it seems to paying-off. Key indicators we're monitoring this week are the Fed's stimulus package, earnings season, and inflation.

We are seeing signs of progress as the hardest hit countries of Italy, U.S., and France daily death toll has been leveling off. Elsewhere, countries that were earlier hit by the virus have begun reopening their economies. While there are varying opinions on the matter, the U.S. has discussed a mid-May time frame to do the same. The markets responded very positively to this news with significant corporate bond spread tightening and one of the best weeks in the stock market since 1974.

Fed keeps the (stimulus) pedal to the medal

On Thursday, the Federal Reserve took additional actions to provide up to $2.3 trillion in loans to support the economy. This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.

"Our country's highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus," said Federal Reserve Board Chair Jerome H. Powell. "The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible."

The three additional support mechanisms the Fed is providing include:

  • Main Street Lending Program: Enhance support for small and mid-sized businesses that were in good financial standing before the crisis

  • Term Asset-Backed Securities Loan Facility (TALF): Expansion of eligible collateral to support further credit flow to households and businesses by broadening the range of assets

  • Municipal Liquidity Facility: Purchase of short-term notes from eligible states and counties to help beef up their depleted reserves as spending has surged and tax receipts have been diminished

See appendix for more details.

Earnings season kicks off, with bank bellwethers the focus this week

Earnings season starts this week with the main highlights being JP Morgan and the other five largest U.S. banks. Given the level of uncertainty, investors will get a glimpse of the damage the coronavirus has caused the nation’s leading lenders. Analysts seem be to at a complete loss as to how to forecast company performance during the pandemic, with one measure showing the difference between high and low earnings estimates at a near record spread. The fundamental obstacle in assessing the damage to corporate balance sheets is the question mark around how long this crisis will persist.

Tracking economic factors: oil, inflation, and the stock market

The price of oil is weaker after a disappointing supply cut announcement of 9.7 million barrels/day, roughly 10% of current global supply. For perspective, the estimated demand shock from the virus is roughly 31 million barrels/day. Not surprisingly, commodity traders feel the agreed cut will do little to help oil’s price recover from a decline of more than 60%. Given how difficult it was to get buy-in on this action, it is difficult to imagine additional cuts being announced anytime soon.

The March core CPI print was the lowest since January 2010 as a number of core sub-components fell at an unprecedented pace. According to Barclays, initially the global COVID-19 outbreak had caused concerns that supply chain disruptions could lead to higher inflation. In fact, the lack of demand for goods and services (e.g., clothes and flights) has sent prices lower and has far exceeded the supply concerns with this trend expected to continue in the coming months.

On the back of roughly 10% gains in stock market last week, the market tone is negative around the globe as uncertainty around the virus outlook persists. Given the disappointing oil cut news, the energy sector is also weighing down market sentiment.

Let’s remain diligent. Please do your part, stay home.

YTD Returns as of EOD Thursday 04/09/2020

US Barclays Agg      +4.01%, 1.47% yield, -336 bps excess return

US Barclays Corp    -1.01%, 3.05% yield, - 1095 bps excess return

UST 10yr                  0.73% yield, -119 bps

S&P 500                   2,789, -13.65%

DJIA                          23,719, -16.89%

OIL (WTI)                  $23.11, -62.24%

Gold                           1,741, +14.54%

04.13.2020 - Top 10 New Issues

04.13.2020 - Top 10 Most Active

04.13.2020 - YTW

Appendix on Federal Reserve Programs

The Main Street Lending Program will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5 percent share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans.

To support further credit flow to households and businesses, the Federal Reserve will broaden the range of assets that are eligible collateral for TALF. The TALF-eligible collateral will now include the triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility will remain $100 billion, and TALF will continue to support the issuance of asset-backed securities that fund a wide range of lending, including student loans, auto loans, and credit card loans.

The Municipal Liquidity Facility will purchase up to $500 billion of short-term notes (24 mo. from the date of issuance) directly from U.S. states, U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. Towns, cities, and states are on the frontlines of this crisis, and their coffers are being depleted thanks to a surge in spending and a collapse of tax receipts. Additionally, a bipartisan group of governors called on Congress to fund an additional $500 billion to help states meet shortfalls. Without extra help, the governors argue, spending cuts could limit a recovery and the public health effort. State and local governments employ roughly 20 million people and contribute roughly 8.5% of GDP in 2019.