Market Overview

Recap

  • Interest rates fell significantly during the month of August as heightened uncertainty pertaining to The global Covid-19 pandemic rocked the global economy and capital markets during the 1st quarter, triggering what will be the first U.S. recession in eleven years;

  • As a result of the fallout from the virus, the S&P 500 posted its worst quarterly return since the 2008 Financial Crisis, and increased solvency concerns widened corporate bond spreads 178 basis points, on an index level;

  • The Federal Reserve responded to this crisis by both cutting the Fed Funds rate by a total of 150 basis points since the beginning of March, as well as invoking several monetary tools previously used during and following the Great Recession, namely Quantitative Easing;

  • In addition to these previously used tools, the Federal Reserve took a page out of the ECB's playbook when they announced that they will for the first time be buying both investment grade and high yield corporate debt;

  • Furthermore, the President and Congress approved several fiscal stimulus measures to assist American families and small businesses, most of which are part of CARES Act passed in late March;

  • Jobless claims in March rose to their highest level in history, as over 22 million Americans filed for unemployment benefits over the last four week alone;

  • Despite taking a backseat to the global health crises, the direction of 2020 Presidential Election became much clearer during the 1st qtr., as the Democratic Presidential Nominee now most definitely is going to be former V.P. Joe Biden.

Outlook

  • Much debate has been given to the shape of the subsequent economic recovery from the virus, which we expect to be "U" shapes, as our analysis suggests that U.S. GDP will contract somewhere between 25-30% on an annualized basis during the 2nd quarter, but we expect a rebound of 15% during the 3rd quarter this year;

  • Though we don't expect this upcoming recession to be quite as severe as the previous one, our team is of the belief that it will be protracted, most likely through the end of 2020, especially if the virus reemerges this fall;

  • Perhaps the greatest secondary consequence of the virus though, behind that of the significant loss of life and loss of income and wealth to millions, will be the period of corporate deleveraging that will follow;

  • Since the 2008-09 Financial Crises, a tremendous amount of debt has built up on corporate balance sheets as a result of the low interest rates policy set forth bet the Federal Reserve and other central banks to stimulate growth of the global economy during and following the Great Recession;

  • Over the coming months, corporate credit market will experience extreme volatility as we enter a period of the fastest and biggest amount of defaults and credit rating downgrades in modern American history;

  • Because of our very conservative approach to fixed income investing over the last year, we were fortunate to steer clear of most of the recent volatility in the credit market;

  • We are excited to be in the position where we can take advantage of these rare, once in a decade opportunity, to selectively and opportunistically add exposure to undervalued credits;

  • We are looking to unlock value in equities by slowly and prudently adding exposure to both the industries that have been most affected by the virus, as well as ones that have been unfairly trounced by the recent selloff.

 

Fiscal Stimulus

 

Fiscal Stimulus

Small-Cap Equities Underperform

 

Small-Cap Equities Underperform

Pennsylvania Leads Jobless Claims

Pennsylvania Leads Jobless Claims

Dividend Cuts Coming

Dividend Cuts Coming

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