We are poised to finish the year with elevated market volatility due to the Presidential elections, Covid-19 phase III results, and the public negotiations of another stimulus bill. The underlying corporate and consumer positives continue to outweigh the negatives largely because the challenges have been supported by unprecedented monetary and fiscal stimuli, which is reasonable given the unique global challenges presented during the pandemic.
Monetary Policy Remains Poised to Act. The Federal Reserve kept rates unchanged at its September meeting AND stated that these rates could remain into 2023. The Fed reiterated that it would allow inflation to exceed the 2% target level before increasing rates. The yield curve is extremely flat with the ten-year US Treasury bond yield standing at 0.67% and the two-year at 0.14%, versus 1.68% and 1.63% a year ago. For comparison purposes, the S&P 500 yield stands at approximately 2.2%. At this time, monetary policy stimuli include monthly asset purchases of $80B of Treasuries across the yield curve and $40B mortgage backed securities. Why is this program in place? The bond program provides for a sustainable functioning market, which was significantly disrupted in the early days of the Covid-19 shutdown. The program helps to facilitate the flow of credit to individuals and companies.
As a reminder, Central banks around the world acted swiftly to effectively provide confidence and liquidity to the broader markets. Maintaining liquidity during stressful times is a key component to keeping an orderly market environment, so this remains an underlying positive. The other key point is that the Federal Reserve and other Central banks stand poised to act if and or when additional action may be needed.
Strong Commitment to Fiscal Stimulus. The political posturing for the next Relief Plan has been going on for many weeks, but elected officials are closer today than they were back in May. The gap between various Relief Plans looks to be approximately $700k. Common support can be found with loans to small businesses, school funding, individual payments, and employee retention tax credits. Opinions and support differ on topics such as Covid-19 liability protection and state and local government aid.
The U.S. has provided $2T and the next relief package is projected to be approximately $2T. Across the world, the collective fiscal stimulus is estimated to be at about $9T, with $4.4T to public sector loans and equity positions, and another $4.6T to guarantees and other activities, according to National authorities and the IMF. European governments committed nearly $1T Euro including both grants and loans to be distributed among countries and sectors most impacted by Covid-19. Additionally, these governments want to be climate neutral by 2050 and are committing 30% of their budgets to climate concerns.
Companies Continue to Pivot. Employers have continued welcoming their employees back to the office with very carefully managed strategies. Many employers have a new sense of work-from-anywhere and are re-imagining policies for this work environment paradigm shift. This year, companies have cut their dividends and suspended share buybacks to fortify their balance sheets and preserve capital. Quarterly earnings are about to begin for the quarter-ending September 30. The expectation for earnings this quarter are still muted, and we expect more CEOs to begin to incorporate outlook commentary into their quarterly earnings reports. Selective merger and acquisition activities are occurring across many sectors.
Strong IPO Activity. The companies coming to market in 2020 raised more than $70 billion, already 12% greater than 2019. This year, like last year, many of the companies coming to market have earnings and several years of operating history, which is a positive. Also this year, we expected the IPO pipeline to be healthy with more companies testing the direct listing path, which means a company lists stock on its own for sale to provide current shareholders with a liquidity event. Recently, Palantir and Asana executed the direct listing path (with some technology glitches) for existing shareholders but overall, it was successful. The direct path to market does not raise new funds or use underwriters but, provides liquidity to the existing shareholder base. The most notable companies that have utilized the direct listing method in the past are Spotify and Slack. We expect this path to the market to build momentum over the next several years.
Special purpose acquisition companies (SPACs) have been an alluring IPO strategy in 2020, raising approximately $36 billion. Years ago, these vehicles were NOT favored like they are presently. Some high-profile SPACs include Virgin Galactic, Draft Kings and Nikola. Essentially, companies are formed and funds are raised through an IPO and then a company is purchased. If a company is not purchased, the shareholders receive their funds back.
Therapies and Vaccines Rapid Development. Several major companies are in phase III human trials on vaccines in their pipelines, which is a positive from a long-term perspective. We expect data from these trials to be coming out over the next several weeks. It is important to note that the rapid development of various therapies and vaccines will continue to create market volatility. We believe the years following the global full court press for the Covid-19 vaccine and therapies will be quite robust for research and development companies and the potential new specialty drugs coming into the marketplace.
Volatility is here to stay. The long-term average VIX (volatility index) value is 26 (the higher the number the more volatility) and most often the value is 12. In 2020, the trading range has been 85 – 12. Since April 2009, the VIX had not traded at 50 or above, until Covid-19, which drove the VIX to trade near 85 in March. We expect more volatility as we move through the presidential cycle, Covid-19 therapies/vaccine phase III results and global unrest.
Our forecast coming into 2020 was a confident and strong educated prediction that by the end of the year, the markets would be moderately higher, up 6%-8%, and we stand by this projection. During this unprecedented year, investors have favored stay-at-home investments and, at times, began to shift to re-opening asset plays, driven by geographic virus statistics across the globe. Year-to-date the sectors driving the broader markets are technology, consumer discretionary, and communication services while energy, financials and utilities have weighed it down, according to spglobal.com.
Here is a glimpse into a few of our big picture thoughts that we will be writing about in future quarters:
- Is the individual and/or corporation migration to more rural locations from urban a secular or cyclical shift?
- How will 5G change lives? Will our migration patterns be influenced by the adaptation of 5G?
- How does just-in-case inventory change countries’ supply chains? How does it impact GDP?
- Will the internet of things improve productivity and reduce carbon footprints?
- Would it be ironic if technology started to drive social and responsible investing and positive environmental change?
We regularly post market commentary and it is important to remember that these are short-term views as we customize respective asset allocations to the individual’s time horizon and risk characteristics. We thank you for your continued faith and trust in us.
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