Now that the warmer weather has arrived, our social-distanced lives are a little bit easier. I hope everyone is spending time outside, and safely getting in their steps or engaging in conversations with friends (at a distance of course).

 

Our team continues to work remotely and are doing so very efficiently. I anticipate that this remote operation will continue at least until September. This month we will be launching a regulatory-compliant version of Microsoft Teams as our official video communication/presentation tool. In the coming months, our clients will see more about that and we will most likely be speaking to our clients on that medium in the near future.

Looking Across the Valley

The last three months have been historical. We transitioned from an emotionally charged market sell-off that was the fastest in market history, to one of the strongest market recoveries ever. Many may be confused by the strength of the recovery given the continuation of COVID-lead uncertainty and negative economic data. The key is to remember that capital markets are forward-looking. The negative economic data we see today was reflected in the decline of late February and March. Global markets are looking well past today’s data points. But how far out? That’s difficult to say with certainty but the current environment of ultra-low interest rates, improving COVID case data, and the single largest direct economic stimulus package in history has set the stage for a long look past Q2 and Q3 and well into 2021. As a result, capital began flowing in early April to companies that are not only seen as survivors but leaders in a post-COVID world (e.g. stay-at-home Technology).

 

As the recovery continues to strengthen, capital has started to look to those companies most negatively impacted by the crisis but which also have a strong possibility of survival (i.e. select Travel, Energy, and Retail). The trouble with that secondary transition is it can often be driven by greed and speculation, particularly when given a push by such massive central bank liquidity injections. We have definitely seen speculation in recent days, and it is our opinion that it is not a sustainable trend, at least not without significant volatility along the way.

 

Overall, we maintain our cautiously optimistic long-term outlook. Yesterday’s significant correction was to be expected. When fear is replaced by greed, a pull-back or a consolidation of recent gains is necessary to correct excessive speculation and is quite normal. As a result, we advise against unfettered enthusiasm.

 

Let’s take an updated look at a few of our key market sentiment indicators:

VIX: Continued Improvement, Still Further to Go

We were pleased to see the VIX average well under 30 for the past several weeks. This was a significant improvement from the all-time high in the low 80s we saw in March. A lower VIX generally means lower volatility in the months ahead. However, yesterday we saw the VIX spike back to 40 indicating some elevated level of expected volatility in the weeks ahead. For reference, we like to see the VIX under 25 as an indication of a more normalized environment.

Credit Spreads: Better, Not Out of the Woods Yet

Both Investment grade (BBB rated or better) and High Yield (below BBB) fixed income rate spreads above government rates have continued to tighten (this is good) but remain elevated above pre-COVID levels. Remember that tighter spreads mean lower cost of capital for businesses. We anticipate a short pause in this improvement before hopefully seeing further improvement in the months ahead.

Flattening the Curve

In examining the COVID case data, it is clear that most developed nations have started to materially flatten their case curves. However, one-time epicenter countries like Italy have been replaced by others, such as Brazil and Mexico, where a peak could be weeks away. Additionally, we remain watchful of the impact of economic “re-openings” around the world, particularly the US, on COVID case data in the weeks ahead.

 

Despite the incredible recovery over the past few months, it is important to remember that the events of 2020 are unprecedented. The global economy was forcibly suppressed into idle, and the impact of this action, at least in the short term, has been devastating on recent global economic data. However, the financial response by global governments has been equally unprecedented, creating a buffer of liquidity to support an eventual return to some semblance of economic normalcy. The challenge will be in how long that process takes and what additional damage occurs along the way if the timeline is extended. As we have already seen, the market is attempting to look ahead to the other side of the valley created by the COVID shut down, and is pricing assets in anticipation of an eventual recovery. Since no one can be certain of the exact timeline there will be differing views, and with those differing views will come volatility. We understand and expect that the next twelve months will see periods of both calm and stress on the way towards recovery. So with that in mind, we remain cautious and flexible in our approach while committed to a strategic diversification across multiple asset classes and our focus on long-term objectives.

 

I hope you and your families are keeping well and I look forward to speaking with all our clients over the next few months.