Today we provide a brief update in advance of the Fourth of July holiday weekend, with the markets closed today. The second quarter that ended on Tuesday was the best quarter for the stock market in more than 20 years. This, of course, came on the heels of one of the worst quarters in recent memory, with the stock market falling 35% in less than six weeks due to the shutdown of the global economy at the start of the coronavirus pandemic. The recovery in the markets has been spurred by strong resumption of economic activity combined with unprecedented government stimulus. The S&P 500 finished the second quarter up 20%, its biggest gain since the final quarter of 1998. The rally has cut losses for the year on the S&P 500 and Dow Jones Industrial indexes to -4% and -9.6%, respectively.
The market has looked past the – especially recent – rising number of coronavirus cases considering improving therapies, falling mortality rates and strong prospects for an effective vaccine. There are over 100 vaccines in development, a handful of which are already at Stage 3 testing. Some lingering concerns remain at the prospect of resumption of shutdown policies in certain hotspots like California and Florida, but for now, the current trend is mitigation through masks and continued social-distancing, with some renewed restrictions on bars and restaurants.
We had another blow-out jobs number this morning with 4.8 million jobs added in June; well above the 3.7 million anticipated. The unemployment rate now stands at 11.1%. The U.S. had lost more than 22 million jobs at the height of the shutdown in April and has since added back 7.5 million. In addition, new claims for unemployment fell this past week to 430,000; the lowest level since February.
Investments
While stocks continue to move higher, bond yields remain low and spreads continue to tighten. Credit and municipals have largely recovered from steep losses in Q1. The general tone of the market remains constructive and firm, and demand continues to outstrip supply. The Fed remains a significant portion of that support by purchasing ETFs and individual bonds through its Corporate Credit Facility, which opened on June 29.
We are also seeing stabilization in the commercial mortgage-backed securities (CMBS) markets after dropping in May. The weakest segments in the BB and BBB- segments have stabilized to some degree over the last few weeks. While we don’t invest directly in the CMBS markets, this is an important indicator for the real estate market. We expect to see a negative Q2 return for real estate; however, most of the impacts have been concentrated in the hotel and retail sectors, where our managers do not heavily invest. As shown in the table below, these two sectors make up the majority share of CMBS that have transferred into special servicing (i.e., workout, both pre- and post-Covid-19).[1]
[1] https://www.fitchratings.com/research/structured-finance/coronavirus-pushes-20-billion-of-cmbs-into-special-servicing-17-06-2020
