With heightened market volatility and significant news flow, Ellwood wanted to share brief, high-level observations on the investment environment. If you have any questions, please do not hesitate to reach out to your consulting team.
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While the Fed’s April minutes indicate extremely elevated levels of uncertainty, recent comments from Fed Chair Powell noted that negative rates are not being considered. The Fed’s balance sheet increased to $6.7 trillion as it ramped up the Paycheck Protection Program Liquidity Facility and the Primary and Secondary Market Corporate Credit Facilities.1
Economic data released during May was dreadful. While initial claims for unemployment insurance remained high at 2.1 million for the week ending May 16, the weekly pace has decelerated since peaking at 6.9 million in late March.2
The recovery in equity prices persisted in May. Globally, stocks gained nearly 5% during the month. Even small cap and value stocks showed signs of life during the second half of May. On a year-to-date basis, the divergence in factor performance remains stark. Growth, quality, and momentum have positive returns while small cap and value remain significantly negative. The disparity in performance is exemplified by the S&P 500. The top five companies in the index (Microsoft, Apple, Google, Amazon, and Facebook) are collectively up 13.6% year-to-date while the remaining S&P 500 stocks are down a combined 10.1%. The top five companies carry a market cap of $5.6 trillion and represent 21% of the entire S&P 500.3
The Federal Reserve began corporate bond purchases under the Secondary Corporate Credit Facility, contributing to compression in both investment grade and high yield spreads. By month-end, investment grade and high yield spreads fell to near the lowest levels since posting their March 23 highs.4
The rise in risk assets this quarter has left low volatility sectors such as REITs, consumer staples, and utilities as the main laggards. WTI crude oil prices surged in May after lagging April’s bounce-back in energy equities and MLPs.5
During May, the U.S. dollar depreciated against most European and Latin American currencies while appreciating against Asian currencies.6
1. Board of Governors of the Federal Reserve System, Reuters
2. U.S. Department of Labor
3. S&P Dow Jones Indices
4. Bloomberg Finance, L.P.
5. S&P Dow Jones Indices, U.S. Energy Information Administration, Alerian
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Published June 2, 2020.