Nearly four months ago, in late February, the 10-year Treasury yield broke to its lowest level ever, undercutting the record lows from 2016 of 1.32%. Over the following two weeks, as fears surrounding the COVID-19 pandemic intensified, interest rates experienced an unprecedented collapse, with the yield on the 10-year Treasury note eventually trading as low as 0.31% on March 9 (Bloomberg). However, consumers who rushed to refinance loans in mid-March may have been surprised to find that mortgage rates, which typically track the path of longer-term Treasury rates, actually spiked significantly during that time.
Although the fight against COVID-19 continues to dominate the headlines and our thoughts are with those affected, this is an election year and as we get closer to November it will begin to garner more attention. Next week in our Weekly Market Commentary, we will discuss the election in more detail, but today we wanted to share a very interesting connection between the stock market and election.
The economy is moving in the right direction, as many economic data points are coming in substantially better than what the economists expected. From May job gains coming in more than 10 million higher than expected and retail sales soaring a record 18%, how quickly the economy is bouncing back has surprised nearly everyone.
Collateralized loan obligations (CLO) are portfolios of leveraged loans, a type of below-investment grade loan usually taken out by more heavily indebted companies. Each CLO is divided into a series of tranches with different degrees of risk. The more senior tranches receive their interest payments first, and therefore, have a higher credit rating. Since the loans carry a floating rate of interest, CLOs provide investors with better protection from inflation and rising interest rates than bonds that have fixed payments.
The US economy has made impressive progress in recent weeks. As the economy re-opens, the way we assess the recovery has changed. In March and April, we were looking for evidence that growth in COVID-19 cases was decelerating—which thankfully it did—along with evidence that a recession was priced into stocks and that stimulus measures were sufficient to get us through the crisis. We used our Road to Recovery Playbook, shown below, to help us determine how the market was progressing in its bottoming process.
The Citigroup Economic Surprise Index, or CESI, tracks how the economic data fare compared with expectations. The index rises when economic data exceeds Bloomberg consensus estimates and falls when data is below forecasts. The CESI has had a volatile year in 2020, as the effects of lockdowns in response to the outbreak of COVID-19 significantly impacted the global economy. As shown in the LPL Chart of the Day, following an all-time low in April, the index has skyrocketed to a new all-time high as the economy’s reopening process continues.
Yesterday, The Conference Board released last month’s reading for its Leading Economic Index (LEI), a composite of leading data series, which showed a month-over-month increase of 2.8%. As seen in the LPL Chart of the Day, the return to positive territory follows three straight months of negative monthly growth.
Stocks staged perhaps the strongest rally in history—a more than 44% gain for the S&P 500 Index from March 23 through June 8—before pulling back about 6% late last week. With so much economic healing ahead of us and a still-uncertain path for COVID-19, the key question for investors is whether stocks are pricing in an overly optimistic scenario for the recovery in economic activity and corporate profits.
US equities continued to gain ground in May, with the S&P 500 Index advancing an additional 4.5%. However, Treasury yields have been remarkably stable since the equity markets bottomed on March 23, with the 10-year Treasury yield trading in just a 16 basis point range during the entire month of May. That all changed this month, as the benchmark yield broke out of its range, moving 30 basis points higher to 0.96% in the first five trading days of June.
The strongest 50-day rally in the S&P 500 Index in over 70 years has sent a signal that the economic recovery is gaining steam and may look more like a “V” than a “U,” a square root, checkmark, or swoosh. We assess the probabilities of these various scenarios for recovery and reiterate our 2020 economic growth forecasts.