Grasping success? Stocks pulled out of an early loss for gains after investors chose to look beyond today’s anything but good feeling news. Euphoria continues to grip the fancy of traders as they invest for better days to come.
N O T E W O R T H Y
Companies are rational… how about investors? For better or for worse, the US is getting back on its feet economically. More and more, once hard-hit hot zones begin to open the shutters of businesses which have tread water since the pandemic made landfall in the US in late February, throwing a once-thriving economy into a tailspin. People are eager to get back to some amount of normal life, albeit slowly and cautiously. Stock investors appear to be a little less cautious, and they appear to be focusing on future growth beyond the virus. Perhaps hopes of a “v-shaped” recovery have been dashed, replaced with a “U-shaped” recovery… a really skinny “U” seems to be the investment thesis du jour. I mean, how can you get worse than 40 million job losses in 10 weeks? Economists are expecting the unemployment rate to have hit 20% in May (we will see on Friday). GDP: bad, Consumer Confidence: getting better but still bad, Manufacturing: on life support, Services: once a major driver is contracting faster than manufacturing, and Corporations… well. As you would expect companies have been hard hit with customers bunkering in their homes (notwithstanding Amazon, Walmart, and grocery stores who stock toilet paper, bleach, and of course, yeast). Rightly so, companies have been given a once-in-a-lifetime pass to… well lose money and even cut dividends in order to stay alive. As the pandemic solidified the Fed rushed in to lower borrowing rates to near zero. Companies like that, especially when they need to borrow money to pay the bills. In a crisis when markets are tumultuous and a recession is all but a given, one would expect the bond market to be soft due to low demand. Not this time. The Fed has been buying bonds and bond ETF’s to ensure that there continues to be solid demand for debt. Companies, being rational, have taken full advantage of the opportunity to borrow at record-low rates. Investors, faced with TINA (there is no alternative) are only happy to buy bonds with low yields… especially when the Fed is buying as well. But what happens after the “V”, “U”, “W”, or whatever letter prevails? Inflation. That’s right, pent-up demand and stimulus money means consumers will rush back in to make purchases, pushing prices of goods higher. Bond markets are closely tied to economic health and inflation. Healthy economies and high inflation require higher yields on fixed income investments. Higher yields mean lower prices for bonds. If investors buy bonds at these low rates, a rapid increase in yields will lower the market value of their investments. Of course, if the bonds are held to maturity, par will be returned to the investor, assuming the company remains healthy enough to pay off the debt. The investor however, will be forced to hold on to an investment which pays lower than market return in the interim. There is a real incentive for companies to borrow as much as possible in these market conditions… very rational. Investors, on the other hand, are buying bonds at record low yields with record tight spreads to treasuries. Where is the rationality in that?
THE MARKETS
Stocks erased early losses caused by increased tensions with China, combined with increased rioting, which is threatening the economic comeback as investors are counting on a swift recovery. The S&P500 traded up by +0.38%, the Dow Jones Industrial Average climbed by +0.36%, the Russell 2000 rose by +0.81%, and the Nasdaq Composite Index advanced by +0.66%. Bonds slipped and ten-year treasury yields were flat at 0.65%.
NXT UP
- Wards Vehicle Sales (May) is expected to show an increase in newly registered vehicles from 8.58 million units last month to 11.10 million in May.
- This morning, we will hear from Dick’s Sporting Goods and Cracker Barrel. After the bell, we will hear from Crowdstrike and and Zoom Video.