Market Update: Thurs, Apr 2, 2020 Earlier gains erased after another massive surge in jobless claims. Stocks opened lower as they look to recover from a rough start to April and the second quarter. The overnight spike in oil prices was the main driver of earlier gains before market participants got a look at the devastating number of job losses announced this morning (more information below). Otherwise, we continue to anxiously wait for progress on COVID-19 containment that could help stocks put in a durable bottom. New unemployment claims double last week’s historic number. Over 6.6 million people filed new claims for unemployment last week, double last week’s reported 3.3 million and almost ten times the worst number previously on record. The nearly 10 million new claims in two weeks represents about 1 in 16 workers, or roughly all the people added to the workforce since the middle of 2015. The speed and intensity of the economic shock from efforts to contain the COVID-19 pandemic were almost unimaginable just a month ago, but we expect these jobs will come back, and the $2.2 trillion in fiscal stimulus to date will help bridge the difficult transition period. Oil prices jump. The price of WTI crude oil is about 10% higher this morning, trading above $22 per barrel, as investors look for a possible truce between Saudi Arabia and Russia. Russian President Vladimir Putin said yesterday that oil producers should cooperate, and US President Donald Trump is scheduled to meet with US oil executives Friday to discuss their concerns. Demand is also getting a boost, with China set to increase its emergency reserves amid the low prices. Another depression? We’ve received many questions asking if this sudden stop in our economy could turn into a depression, similar to the 1930s. Fortunately, we don’t see that happening. There were four major mistakes that helped extend the length of the Great Depression: monetary, fiscal, regulatory, and trade mistakes. In all cases, today’s response has been drastically different. Resilient manufacturing report, but with caveats. Wednesday’s Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) for manufacturing fell just one point to 49.1 and exceeded expectations. However, peeling back the onion reveals that lengthening supplier deliveries, normally evidence of strong demand, provided artificial support due to supply chain disruptions. The drop in the more forward-looking new orders component to recession-like levels provided further evidence that the US economy is in recession.
A Technical Look at Market Internals Following last week’s more than 10% gain, the S&P 500 Index is tracking toward another weekly loss, its fifth of the last seven. This has many investors wondering if a retest of the lows may be in the cards for US equities. As we explored in our How Markets Bottom post, two of the bear markets we believe show the most similarities to our current one did retest or undercut the lows after the worst of the selling. “Whether or not we get a retest is an open question,” said LPL Financial Senior Market Strategist Ryan Detrick. “But we believe we’ve seen the worst of the selling, and we will be watching to confirm that fewer individual stocks are making new lows on a further pullback in the indexes.” As the LPL Chart of the Day shows, although the S&P 500 made its low on March 23, more stocks actually bottomed a week earlier on March 16, when more than two-thirds of the individual stocks in the index hit a one-year low. Regardless of the direction of the S&P 500 over the coming days, we want to see this trend of fewer stocks making new lows continue.
Semis vs Energy - A New High Mon, Apr 6, 2020 The last several weeks have been a tough time for just about every sector of the market. While there have been some individual stock winners, every major sector is down and down sharply. Some groups have held up better than others, but no one has been spared. We've written a lot over the years about how semiconductors are the lifeblood of the 21st-century economy. Semis are ubiquitous in every facet of our lives and in this stay at home and work from home world the COVID-19 outbreak has thrust upon us, the statement has never been more true. At the same time that semis have seen a more prominent role in the economy, oil, which was arguably the life-blood of the 20th-century industrial economy has seen its role diminished even more than it had already been. With everyone working from home, there's barely a car on the road. Just look at this chart showing the speed of evening commutes across US cities during the week of 3/20 relative to the week before. Commute times are faster in just about every major city and in some cases much faster. Keep in mind too that this is data as of 3/20. Since then, there's even fewer cars on the road! Given the acceleration of an already emerging trend, we wondered how this shift has been showing up in the market. Since the S&P 500's record high on 2/19, the SOX has dropped just under 20%. That's a pretty horrific decline in such a short period of time, but it's less than half of the decline of the Energy sector which is down over 40%! The chart below compares the relative strength of the Philadelphia Semiconductor Index (SOX) relative to the Energy sector going back to the early 1990s. In the chart, a rising line indicates that the semis are outperforming energy, and vice versa for a falling line. On the right side of the chart, we have also enlarged the period since the start of 2019 so you can see more detail. What's really notable about this chart is that in just the last two weeks, the relative strength of the SOX has hit a record high after first overtaking the prior record high from March 2000. Just a few months ago, it seemed like it would be years before the relative strength of the SOX would ever eclipse the record high it made at the peak of the dot-com bubble. At that time, no one would have guessed that the catalyst for taking the SOX over the hump would be the swiftest bear market in history.
Semis Holding Up Relative to Market Tue, Apr 7, 2020 In a post yesterday, we noted that the relative strength of semiconductors versus energy had finally eclipsed its record high from the dot-com boom in March 2000. Semis have not only exhibited relative strength versus the energy sector; they've demonstrated strength versus the broader market as well. Take the relative strength of the Philadelphia Semiconductor Index (SOX) versus the S&P 500. In the early stages of the market decline from the February highs, semiconductors saw a sharp drop in their relative strength, but in late March, the SOX surged relative to the broader market and actually hit a record high on March 24th. With Technology playing an increased role in the stay-at-home and work-from-home economy, it makes sense that semis would hold up relatively well. From that high on 3/24, we saw a modest pullback in the strength of the semis relative to the S&P 500, which then bounced again in recent days. Going forward, the key for the semis is over which level it breaks first. Will it be the March high or the short-term low three days later on 3/27 that followed. Whichever way it breaks will likely dictate which way the broader market goes as well.
Infrastructure Spending: A Welcome Way To Push Up Activity After COVID Clears Tue, Apr 7, 2020 Congress has already passed one relief bill (the CARES Act) which offers expanded unemployment benefits, cash payments to households, loans to businesses and state or local governments, and other provisions. Discussions continue about further stimulus. Congress would be well-served to consider either direct spending on infrastructure or grants to the states to do the same. As shown in the chart below, investment spending by governments at all levels has been historically low, and infrastructure spending would help economic recovery after the initial collapse and bounce-back in activity has played out.
Good Friday Trading: Strength Before Weakness After Tradition can provide some solace in these historic and trying times. So as the Hirsch household grates fresh horseradish root among other family traditions to prepare for our first tele-Seder on Zoom for the first night of Passover tonight I like to wish everyone a sweet Passover and a happy, healthy and safe Easter. In keeping with our traditional seasonality posts, here is the update on the trading patterns around the Good Friday NYSE Holiday. I took the picture above of the mosaic on the interior of the dome of the Church of the Holy Sepulchre in Old City of Jerusalem in August 2018 on our family trip for my oldest son’s bar mitzvah. It seemed apropos for today. Good Friday is the one NYSE holiday with a clear positive bias before and negativity the day after. DJIA, S&P 500, NASDAQ and Russell 2000 all have solid average gains on the day before but are all net losers on the day after Easter since 1980. NASDAQ has been notably strong, up 18 of the last 19 days before Good Friday with the one loss occurring in 2017. The day after Easter has the worst post-holiday record though average losses are steeper after Presidents’ Day. The S&P 500 was down 16 of 20 years from 1984-2003 on the day after Easter but is has been up eleven of the last sixteen years.
Big Annual Declines Are Rare Stocks have rallied nicely off the March 23 lows on the back of a bold policy response from the Federal Reserve (Fed) and lawmakers in Washington, DC, which was followed by signs that a peak in growth of COVID-19 cases may come soon. At Wednesday’s close, the S&P 500 Index stood 19% above the March 23 closing low but down 17.7% for the year. That begs the question whether a positive year is possible with a pretty big hole still left to dig out of. “A positive year for the S&P 500 is still possible but will require a steady recovery in economic growth and corporate profits in the second half of the year,” noted Jeffrey Buchbinder, LPL Financial Equity Strategist. “We remain hopeful that COVID-19 can be contained over the next month or two and enable the US economy to begin to open up early this summer, but it’s just too early to tell.” As we see in the LPL Chart of the Day, big down years are rare. In fact, since 1950, the S&P 500 has fallen more than 15% just four times (1973-74, 2002, 2008). All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. So might 2020 look like 2009, a big up year for stocks as the worst of the financial crisis passed and markets looked ahead to recovery? That year the S&P 500 was down 25% year to date before rallying to end the year higher. Or is this another 1973-74, or even 2000-2002, with stocks in the doldrums for an extended period? Given the possibility that the bear market catalyst might be removed over the next couple of months, we expect the bear market recovery to be relatively swift by historical standards—potentially faster than the 20-month average and hopefully closer to the non-recession bear market recovery average of 10 months. The key to a possible rebound, beyond timely containment of COVID-19, will be investor confidence in recovery. The bold policy response, part of our Road to Recovery playbook, is helping bridge many businesses to the other side of the crisis. We think chances are good that 2020 ends up being closer to the middle of the accompanying chart rather than the far left. During these uncertain times, it’s important for investors to keep in mind that markets are forward looking. The latest bounce off of the late-March lows provided evidence that market participants are doing just that. We don’t know if a durable stock market low is in just yet, and volatility may pick up again as more bad economic news and corporate stress is revealed. Our resolve is being tested, we but we remain optimistic about prospects for a strong recovery in the second half of the year.
Handful of New 52-Week Highs Wed, Apr 15, 2020 With the S&P 500's rally off of the 3/23 low continuing yesterday, a handful of stocks in the index actually made new 52 week highs! Other than yesterday's new highs, there are only 19 stocks in the index that have reached a 52 week high at some point since the beginning of March. Regeneron (REGN) was one of the few stocks that rallied in that time frame on hopes that the company would develop a treatment for COVID-19. Other than REGN, stocks in this group seem to be plays on the COVID economy including consumer staples retailers like Walmart (WMT) and Dollar General (DG) as well as plays on Americans staying at home like Netflix (NFLX) and Amazon (AMZN). With that outperformance during the worst of the sell-off and solid gains since the March 23rd low, most of these stocks are currently mid to high single digits above their February 19th levels except for Regeneron (REGN) and Newmont (NEM) which are 30.94% and 29.72% above, respectively. As shown in the table above, which can also be seen in the charts from our Chart Scanner below, the COVID collapse that lasted from February into March only resulted in Amazon (AMZN) reaching a 52-week low. AMZN's 52 week low occurred on March 16th; one week before the rest of the market's bottom. Every other stock of those that made a new 52-high yesterday saw its 52-week low at some point in 2019. As shown below, several of these stocks reaching 52-week highs means that they have cleared some form of significant resistance. Dollar General (DG) and Netflix (NFLX), for example, unsuccessfully tested resistance multiple times within the past year before these most recent breakouts. As for trends, each one is currently in a rough uptrend over the past six months to a year putting aside some disruption from the volatility of the recent sell-off.
Why The Recent Strength Has Bulls Smiling The huge equity rally continued last week, with the S&P 500 Index up another 3%, on the heels of adding more than 15% in the previous week. The gain during the past two weeks of 15.5% was the greatest since October 1974. Taking it a step further, the 15 trading days ending April 14 saw the S&P 500 up more than 27%, one of the greatest rallies ever. What we’ve been seeing is truly historic, so the big question now is: What could happen next? “This remarkable rally has caught most off guard, but what might surprise many to hear is more gains could eventually be in store in 2020,” explained LPL Financial Senior Market Strategist Ryan Detrick. “When we’ve seen similar blasts of extreme short-term strength, stocks have been quite strong going out 6- to 12-months.” As shown in the LPL Chart of the Day, the S&P 500 was up nine of 10 times six months later and higher every single time a year later after the previous best 15-day gains ever. Be aware though, some of the returns in the near-term were weak, suggesting a pullback after such a strong move is likely. Still, this much strength in such a short timeframe could very well suggest the rest of 2020 could have bulls smiling.
LPL Office Talk: Putting The Rally In Perspective One month ago today the S&P 500 Index bottomed after a vicious bear market. Was this the ultimate bottom? We’ll have to wait and see, but what we do know is the rally we’ve seen over the past month is nearly as historic as the drop coming into it was. “We recently had the best 20-day rally for the S&P 500 since March 2009 and one of the best ever,” explained LPL Financial Senior Market Strategist Ryan Detrick. “Looking back at the previous best 20-day rallies, one thing is consistent: very strong returns going out a year.” As shown in the LPL Chart of the Day, the 10 previous best 20-day rallies for the S&P 500 saw continued gains after some near-term volatility. In fact, six months later stocks were higher 9 of 10 times and a full year later higher 10 of 10 times.
The Smaller The Better Mon, Apr 27, 2020 While lately it seems as though all anyone is talking about is the concentration of market cap in the largest stocks in the S&P 500, you may be surprised to hear that small caps have actually been leading the charge higher from the market lows. It's been neck and neck, but while the S&P 500 is up just over 31% from its intraday March low, the Russell 2000 is up over 32%. Granted, the Russell 2000 is only outperforming the S&P 500 by a slim margin, but it's micro-cap stocks that have stolen the show. Since its low in March, the Russell Micro Cap Index is up 36% and actually back above its 50-day moving average for the first time since late February. The index is still down much more from its highs than either the Russell 2000 or the S&P 500 and the index's entire market cap is only $365 billion (less than the market cap of Walmart WMT), but from the lows at least, micro-cap stocks have been on fire. The last four days have been especially strong for the smallest of the small stocks as the Russell Micro Cap index has risen at least 1% on each of the last four trading days, including a 3.8% gain today. The Russell Micro Cap Index has only been around since 2006, but during that time there have only been two other periods where the index saw four straight days of 1%+ gains. The first was in late October 2008 while the second was in August 2009. Back in October 2008, if you chased micro-cap stocks after their four-day rally, the next few months were pretty painful, but the occurrence in August 2009 came in the early stages of the bull market.
More and More Equity Market ETFs Back Above Their 50-DMAs Tue, Apr 28, 2020 It hasn't been talked about much but the Nasdaq 100 (QQQ) remains up on a year-to-date basis with a 2020 gain so far of 1.62%. Below is a snapshot of QQQ and other major US index ETFs run through our Trend Analyzer tool that's available to Bespoke Premium and Bespoke Institutional members. Note that all but two of these index ETFs have now moved back above their 50-day moving averages, which often acts as a key support/resistance level. The Nasdaq 100 (QQQ) is the farthest above its 50-DMA at +6.81%, followed by the S&P 100 (OEF) and the three main S&P 500 ETFs (IVV, SPY, VOO). The Total Stock Market ETF (VTI) is 2.8% above its 50-DMA, while the mid-cap ETFs like IWR, IJH, and MDY are all just slightly above their 50-DMAs. While the Micro-Cap ETF (IWC) is above its 50-DMA, the two main small-cap ETFs (IWM, IJR) are the ones that remain slightly below. Below is a snapshot of the main S&P 500 sector ETFs from our Trend Analyzer tool. While almost all of the broad US index ETFs are back above their 50-DMAs, only six of eleven of the sector ETFs have re-taken them. The Health Care sector (XLV) is the farthest above its 50-DMA at +9.42%, and Health Care is the only sector that is now trading in overbought territory. It's also the only sector that's up year-to-date, similar to QQQ. Consumer Discretionary (XLY), Technology (XLK), Materials (XLB), Communication Services (XLC), and Consumer Staples (XLP) are the other five sectors above their 50-DMAs. On the downside, the Energy sector (XLE) is no longer the farthest below its 50-DMA; that title now belongs to Financials (XLF) which is 3.73% below. The Industrials sector (XLI) is 2.9% below its 50-DMA, followed by Energy (XLE) at -1.38% and Utilities (XLU) at -0.80%. While Health Care is up on the year, three sectors -- Energy, Industrials, and Financials -- are still down more than 20% year-to-date
This is Still an Election Year We have all been rather preoccupied with the coronavirus pandemic, market volatility and our individual situation. Meanwhile there is still a U.S. Presidential Election taking place this year. And folks are beginning to wonder what the next political alignment might be and the ramifications that alignment has had on the market historically. Six possible political alignments exist in Washington: Republican President with a Republican congress, Democratic congress or split Congress; and a Democratic President with a Democratic Congress, Republican Congress or split Congress. Data presented in the chart below begin in 1949 with the first full presidential term following WWII. Election years are traditionally up years. Incumbent administrations shamelessly attempt to massage the economy so voters will keep them in power. But sometimes overpowering events occur and the market crumbles, usually resulting in a change of political control. Republicans won in 1920 (DJIA -32.9%) as the post-war economy contracted and President Wilson ailed. The Democrats came back during the 1932 (-23.1%) Depression when the Dow hit its lowest level of the 20th century. A world at war and the fall of France jolted the market in 1940 (-12.7%), but Roosevelt won an unprecedented third term. Cold War confrontations and Truman’s historic upset of Dewey held markets down through the end of 1948 (-2.1%). Recently the Great Recession and bear market of 2008 (-33.8%) helped put Obama and the Democrats back in the White House.
Road to Recovery Playbook: Peak COVID-19 Cases We continue to follow our Road to Recovery Playbook for help determining where the market is in its bottoming process and yesterday we upgraded Signal #1, confidence in timing of a peak in new COVID-19 cases, to “Already there.” “Three of the five signals from our Road to Recovery Playbook are now in place,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “With the S&P 500 Index more than 25% off its lows, stocks are no longer pricing in a recession and are no longer oversold from a technical analysis perspective, making the near-term risk-reward trade-off less favorable. We believe a more attractive entry point may emerge soon.” Assessing the peak of the impact of COVID-19 on the US has probably been the most difficult signal in the Playbook to call with any degree of certainty, due to the unprecedented nature of this outbreak and the many data points available—new cases, hospitalizations, deaths, recoveries, testing rates, positive tests, etc. All of these factors have stabilized or improved in recent weeks. Even in New York, the epicenter of the US outbreak, most data points are at multi-week lows with new hospitalizations on course to trend to near zero by early May. One of the most impactful factors influencing the number of new COVID-19 cases appears have been the availability and rate of testing performed. For this reason, we now may be at a point where even a slight rise in the number of positive test results is not necessarily bad news. As shown in the LPL Chart of the Day, since the first week of April, the number of new COVID-19 cases in the US has remained fairly steady, even as the testing ramped up significantly in the last week. Increased testing rates are beneficial because they provide a clearer picture of the scope and deadliness of the virus. The number of tests per positive result in the US has been falling in recent weeks but has not yet reached the World Health Organization (WHO) guideline of 10% positive results, indicating that there is still work to do to increase testing enough to capture the majority of people who have been infected. Additional data published in recent COVID-19 antibody tests (albeit with small sample sizes) in San Francisco, Los Angeles, and New York all appear to suggest far more widespread asymptomatic or mild symptom prevalence of the virus in the general population. This would suggest that as testing increases, there may be an absolute increase the number of new cases but that it will not translate into more hospitalizations or deaths. Again, this wider prevalence is good news, as it implies that the overall hospitalization and case fatality rates are much lower than originally feared. As many states across the US allow businesses to reopen, relax stay-at-home orders, and ease travel restrictions, LPL Research acknowledges that another wave of new cases is possible. Should another wave hit—of course we certainly hope it doesn’t—we expect the healthcare system may be in a better position to handle it. Given the pre-outbreak economic strength, the apparent transitory nature of the threat, and massive stimulus, we expect a recession to be short in duration, but likely deep. Even with the S&P 500 up so much from the March lows, we continue to like the opportunity for long-term investors and maintain our overweight equities recommendation for suitable investors.
Energy (XLE) Finally Above Its 50-DMA Wed, Apr 29, 2020 As we noted yesterday, more and more sectors have begun to cross back above their 50-DMAs in the last couple of weeks. With the outperformance of recent underperformers in yesterday's session, the most beaten-down sector, Energy (XLE), finally managed to move back above its 50-DMA. Yesterday marked the first time that XLE had closed above its 50-DMA since January 10th. As for today, XLE is poised to gap up over 3% at the open bringing it further above its 50-DMA. With XLE being under its 50-DMA for nearly four full months, that streak ending at 74 trading days was the fifth-longest in the ETF's history. The last time XLE experienced a similar streak was in 2017 which was actually the longest streak on record ending at 119 days. The other longer streaks came in 2015, 2008, and in 2001. As for performance after these long streaks below the 50-DMA come to an end, XLE has typically been pretty weak. In the table below, we look at all prior streaks below the 50-DMA that lasted for at least 60 trading days (roughly three months). One week after such streaks come to an end has only seen XLE higher around a quarter of the time with an average decline of 0.47%. Returns have also been positive less than half of the time one, three, and six months later. Fortunately, one year later XLE has been higher 71.4% of the time with an average gain of 2.8% (median 6.17%), although even here, those returns are nothing to get overly excited about.
Silver Lining in Consumer Confidence Data The Conference Board’s Consumer Confidence Index (CCI) for April came in 86.9, falling more than 30 points from the prior month. The monthly drop was the biggest for the index since 1973, reflecting the severity of the economic impact of COVID-19 containment efforts. This piece of economic data is seen by some economists as a leading indicator for consumer spending and the US economic growth. The CCI measures consumers’ feelings about current and future economic conditions, including how respondents feel about their ability to gain employment. Some economists view the CCI as a lagging indicator, given the data tends to follow economic trends. When a recession is over and growth resumes, individuals who are not yet working may not feel the improvement. These individuals may remain uncertain about whether the economic climate has improved for quite some time. Consumer confidence has taken a hit from lockdowns related to the COVID-19 pandemic. In February, the index was at 132.6, just 5.3 points below an 18-year high reached in October 2018, when the CCI reached 137.9. Before that, one of the highest readings came in May 2000, when the CCI reached 144.7. The index is still well above the record low recorded in February 2009 at 25.3, suggesting it may have a bit further to fall from the April reading. It’s a foregone conclusion that a measure of consumer confidence would suffer as a result of the devastating job losses experienced since the lockdowns began. But there is a silver lining in this data. The expectations component of the survey actually rose 5.6 points from the prior month. ”This is one of the most difficult economic environments our country has ever faced and our resolve is being tested,” said LPL Financial Chief Investment Officer Burt White. “But as states begin to reopen their economies, we can start to see the other side of this crisis.” We’ll get there, supported by the massive fiscal and monetary stimulus out of Washington, D.C., and the Federal Reserve. This optimistic tone in the expectations component is great to see. Hopefully more is yet to come. Background on the CCI. The Conference Board, which was founded in 1916, measures the CCI. The board is an independent, non-partisan and non-profit, economic research organization that performs surveys and economic analysis. The Consumer Confidence Index started in 1967 and is benchmarked to 100 based on readings in 1985. The data is collected during the first 18 days of the month for release on the last Tuesday of the month. There are five questions asked of the survey’s 5,000 respondents each month. The first two ask respondents’ view of current business conditions and their six-month expectations. The third and fourth questions are about the labor market as well as six-month expectations. The last question covers family income expectations in six months’ time. Participants characterize conditions as good or bad, and jobs as hard to get or plentiful. Then responses are categorized as positive, neutral, or negative. More positive responses means a higher index, neutral and negative responses means a lower index.
50-DMAs in the Rearview Thu, Apr 30, 2020 Stocks have continued to rally this week and for many individual names, these gains have lifted them above their 50-DMAs. As shown in the chart below, over three quarters of stocks in the S&P 500 have now moved back above their 50-DMAs. Three sectors—Technology, Communication Services, and Health Care—have more than 90% of their stocks above their 50-DMAs with Health Care leading the way at 96.7%. Readings above 90% are very rare -- just as rare as the sub-10% readings we saw in March. As for the other sectors, similar to the S&P 500, Consumer Staples, Consumer Discretionary, and Materials all have over three-quarters of their stocks above their 50-DMAs. Meanwhile, Financials, Industrials, and Energy are lagging somewhat but still have more than half of their stocks above. The only two sectors that are truly lagging with just 32.1% and 38.7% above, respectively, are Utilities and Real Estate -- two defensives. Health Care and to a lesser degree Consumer Staples were the first sectors to see a large number of stocks trade above their 50-DMAs. This reading for both sectors saw a more gradual build throughout April. As for the rest, the percentage of stocks trading above their 50-DMAs has exploded higher and in a much more rapid fashion, especially within the past week. In fact, as recently as last Thursday, excluding Health Care and Consumer Staples, the highest reading across sectors was only 40.85% (Technology). The big pickup in the number of stocks moving above their 50-DMAs means two things. For starters, many stocks are clearing resistance at their averages which is a positive technical development. Second, many stocks are roughly around the same areas of their trading ranges and are moving higher together (strong breadth).
Bulls Crawling Back Thu, Apr 30, 2020 The volatile swings in crude oil last week sent investor sentiment sharply lower with only 24.86% of investors reporting as bullish which was the lowest level of bullish sentiment since the COVID-19 outbreak began.. With things calming down in the days since and with equities continuing to grind higher, sentiment has improved as the percentage of investors reporting as bullish rose to 30.6%. While an improvement, that is still less than where bullish sentiment has been over the past several weeks. Since the sell-off began on 2/19, bullish sentiment has averaged 33.44%, around 3 percentage points above current levels. Last week, we noted a strong bearish bias in which the percentage of bearish investors doubled those reporting as bullish. That has subsided this week as bearish sentiment pulled back from 50% to 44.03%. With less than half of investors now negative, bearish sentiment is within one percentage point of its average since the 2/19 peak, 44.83%. Most of the gains and losses to bulls and bears took from each other as neutral sentiment went little changed. 25.37% of investors reported as neutral which was only 0.23 percentage points more than last week's reading of 25.14%.
Global Central Banks All In The Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ) all met in the last week and while the show of power was minimal compared to recent weeks, they collectively reasserted their resolve to do whatever is necessary to support the global economy through the COVID-19 economic crisis. Rates are being held about as low as they can go, significant new programs to enhance market liquidity and support lending are in place, and, as shown in the LPL Chart of the Day, asset purchases have accelerated. In fact, with April not yet completed, central bank assets have risen over $3 trillion, the biggest two-month jump on record. “The central bank response to COVID-19 has been fast, effective, and built to impress,” said LPL Financial Senior Market Strategist Ryan Detrick. “And the market is seeing it. It’s no coincidence that the market bottomed the day after the Fed rolled out a wide range of new programs addressing key areas of market and economic disruption.” Overview of Recent Central Bank Activity The Fed concluded its most recent two-day meeting on Wednesday, April 29. Prior to the meeting the Fed had expanded its program supporting municipalities by lowering the minimum size of the city or county to qualify. The Fed left its target rate unchanged at 0 – 0.25%. Through its policy statement and Fed Chair Jerome Powell’s comments, the Fed signaled that it is unlikely to remove its extraordinary policy support anytime soon, and we believe the Fed may hold its policy rate near zero into 2022. Asset purchases are currently open-ended and have expanded to include investment-grade and high-yield corporate exchange-traded funds. The BOJ met on Monday, April 27 and announced that it would lift its cap on buying government bonds, making purchases open ended, and triple the size of its corporate bond commercial debt purchases. The ECB met on Thursday, April 30 and announced new refinancing operations and that it would ease conditions on long-term loans to banks, encouraging banks to increase lending. With interest rates near zero, all major central banks have been expanding their economic support through new programs and increased asset purchases. Central bank are showing that in a time of crisis, their policy response is not limited to setting policy rates or even bond purchases. The expanded activity has all but eliminated the idea that the central banks are out of ammunition, both now and looking forward. There will come a time when these programs will end, balance sheets will unwind, and rates will rise. But until that time, central banks have shown that even prudent support in a time of economic distress is only limited by their imagination, keeping the old investing maxim “Don’t fight the Fed” alive even in an age of zero rates.
How Municipal Bonds May Weather the Storm Like other areas of the economy, the finances of states, counties, cities, and towns have been heavily impacted by efforts to contain the COVID-19 pandemic. The disruption has raised concerns for municipal bond (“muni”) investors. As shown in the LPL Chart of the Day, municipal bond yields, a measure of risk, have started to rise again compared with similarly dated Treasuries after looking like they were trending downward. “Municipal bond investors are concerned and rightfully so,” said LPL Financial Chief Investment Officer Burt White. “And state and local governments are facing nearly unprecedented challenges. But the good news is the federal government and Federal Reserve (Fed) have stepped up to help see municipalities through this crisis.” Municipal bond yields spiked early in the bear market, as a move to safer Treasuries along with illiquid conditions pushed muni bond prices lower and yields higher. Fed intervention to support muni markets did help to take some of the pressure off. The federal government’s CARES law also ear-marked $150 billion for municipal costs associated with the COVID-19 response, increased existing grants, and created a new loan program. Significant added federal government support for municipalities will likely be a major part of the next stimulus package, but the size and the scope of any package is still the subject of debate, and is likely one of the catalysts behind the relative yield’s recent move higher. Contrary to other parts of the bond market, the Fed is not buying municipal bonds in the open market, but it’s doing a few things to support municipalities directly and the municipal bond market indirectly. The Fed is lending directly to municipalities through its Municipal Liquidity Facility, which will help municipalities get access to needed credit to get through a temporary period of shortfalls. This program has recently been expanded to make more municipalities eligible and increase the length of the potential loans. It’s also allowing shorter maturity municipal bonds to be used as collateral by banks. Since banks can more readily turn eligible municipal bonds into short-term cash if needed, holding munis becomes more attractive, supporting demand. While municipalities, like the rest of the economy, are facing an extremely challenging period ahead with budget shortfalls and spending cuts likely, we think current federal programs and likely added support to come, on top of “rainy day” funds set aside for just these types of circumstances, will help see the municipal bond market through the economic slowdown. There will be isolated defaults, but we believe the overall market will return to normalcy over time. The good news is that while higher yields come with higher risk, they also have higher return potential, which can create attractive opportunities for tax-sensitive investors, since income from munis is often exempt from federal taxes as well as state taxes in the state where they were issued. But with municipal finances highly differentiated, active management may be especially important, both for building a relatively safe, diversified core for a municipal bond portfolio and for finding potential opportunities.
