As we approach Memorial Day, we offer our thanks to those that made the sacrifice for us as well as those on the front lines today in our current crisis. At this time, we would typically be hearing frequently the investor axiom, “Sell in May and Go Away” across the investment landscape. This adage was born out of an old English saying “Sell in May, go away and come back on St Leger’s Day” referring to the custom in the UK of the wealthy aristocrats and bankers retiring to the country for the hot summer months and returning after the St Legers Stakes horse race was held in September. In more modern times there was some statistical support that as the temperatures rose, volumes in the markets would shrink and volatility would increase making it a less desirable time to invest. There has been little evidence of this effect since 2013 and investors who have sold missed on market gains. There is no doubt that this summer will be very different from any in recent memory. Thus far in May there are few signs that investors are selling with the S&P 500 closing at the highest level since early March yesterday. For the year to date period the S&P is down 7.9% but well off the March 23rd lows.
The market did see some volatility last week as comments by the Fed Chairman Jerome Powell regarding the length the recovery did concern investors. Poor economic reports also dampened investor enthusiasm with labor reports remaining very challenging. Chairman Powell did provide additional color in an interview aired on Sunday reinforcing that the Fed has more levers to pull in supporting financial markets and is committed to supporting the market liquidity. These comments were well received as evidenced by Monday’s trading. Markets were also buoyed by some positive results on one of the leading vaccine candidates, but we would caution that developing vaccines are difficult and it take time to produce one that is efficacious and safe for the general population. Liquidity in the credit markets remains good with many issuers accessing the markets to meet their needs in both the corporate and municipal markets. We have seen a slight uptick in rates for Treasuries as the market is digesting the new Treasury offerings, but they still remain very low. Another positive is the credit markets have seen an increase in supply from both corporate and municipal issuers which has been met with little disruption to the markets.
The Fed continues to deliver the message that they will be the lender of last resort and continue to support the liquidity of the financial markets. In addition to these comments Chairman Powell did put some responsibility on Congress, saying that more fiscal stimulus was needed to support businesses until the recovery in the economy can fully take hold. As we have noted previously, future congressional action will be more contentious and take time to negotiate. On Friday, the House passed a $3 trillion stimulus package dubbed the “Heroes Act” with a 208-199 vote, mostly along partisan lines. The Senate leadership has already said this bill would not move forward and view it as more of a wish list than a proposal. There is an appetite by both chambers to provide more fiscal support. The size, shape and timing is not clear at the moment, but most Washington observers are speculating an agreement can be completed before the July 4th recess.
The market has also seen some support from the recovery in oil prices. A month ago, we were closing out the April futures contract and talking about the first ever negative oil price. This month we are closing with a rally in oil pushing it back above $30 per barrel. The contract was already benefitting from some structural changes in the holdings of the oil ETFs but also from signs of increased demand as economies globally started reopening. We have seen some early demand modification in some regions as commuters are choosing their cars over public transportation. Storage has also absorbed the excess supply we were seeing in April as we actually saw a slight decrease in the inventory report last week. And probably the biggest impact has been the production curtailments globally. It was expected that many of the OPEC+ production cuts would take time to implement, but the response has been much faster than expected. In addition, not only did Saudi Arabia move faster to implement their supply cuts, they increased their near-term production cuts to help stabilize the market. The market has rewarded those actions with the near-term recovery in oil prices, but demand remains an issue until we see economic activity recover from the forced shut-downs to combat Covid-19.
The markets will be very focused on the results of the re-openings that have started and how the rate of infections respond to the increased activities. On the health side, the news on vaccines will grab headlines, but having one available is still at months away at best. Current near-term focus by health officials will be containment with testing and what type of contact tracing will be possible. New medicines and treatment techniques will also be highlighted in the coming months as healthcare workers share what they have learned from treating Covid-19 patients. This experience along with other the containment measures will help bolster the toolkit healthcare workers will be using to treat the Covid-19 outbreak. As the toolkit gets more robust, people will gain confidence in resuming some of their pre-virus activities.
Looking forward markets will continue to do what they do, trying to discount the future economic outlook for businesses and the impact on the company’s profit potential. We would continue to expect rates to remain low for an extended period of time, the equity markets will be taking its cue from the economic outlook and if it will have a hangover effect on 2021 earnings. Credit spreads remain elevated for corporate bonds reflecting some of those economic concerns. Investors should remain focused on their long-term investment plans. We continue to reinforce that in times of stress, investors should follow their investment plan and not attempt timing the market. If you are uncertain about your plan and level of risks you are taking, speak to your advisor.
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