In the May issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he discusses how this recession is unlike previous market dislocations and despite having a simple trigger, the impacts and investment implications are harder to gauge.
  • In Focus by Head of Municipal Fixed Income Dan Scholl compares how IG munis have fared against their fixed income counterparts and discusses how munis will benefit from the stimulus and what we can expect from this asset class
  • Investment positioning and taxable fixed income asset class overview.

There’s rarely been a time when the economy and markets were so entirely driven by a single factor. Even the previous recession that was caused by a housing market bubble had myriad root causes and complicated financial products as main players. This new recession is caused by the sudden arrival of a single microscopic organism and the effort to stop its spread. Somehow, despite the simple trigger, the impacts and investment implications are even harder to gauge. With maddeningly fast and completely unknowable developments in testing, therapeutics, and vaccines at the core of how this plays out, we believe if there were ever a time for investors to embrace humility, it is now.

To that end, at no time that I can recall have markets behaved in such a spectacularly unintuitive manner. Despite the economic carnage, April yielded the best monthly equity returns in approximately 33 years. As tempting as it may be to dismiss these gains as technical, tenuous, and transient, we must challenge ourselves to examine what the markets see that we may be overlooking. In short, we believe the equity market is betting on the coupling of open-ended fiscal and monetary support with a successful race for a vaccine in 2020 to bail us all out. Equity markets may prove prescient of the future, but the virus remains firmly in charge of the present.

The virus remains in charge

As the virus continues to batter the economy and markets, the focus is rightfully on scientific developments to test, treat, and vaccinate. Recent headlines are dominated by a smattering of governors who are removing mitigation efforts in order to restart economic activity. As of the first week of May, there were 24 states moving toward a partial reopening of their economies and six that were slated or anticipated to do the same in the near future. If successful in meaningfully expanding economic activity, these changes would largely defy the predictions of many medical experts who see a tinder box waiting to flare. If the scientists prove correct and the reopenings fail, the economy and the markets may pay a dear price.

In our view, nominal reopening of the economy will not by itself be sufficient to restart the economy. Until consumers feel safe, businesses are confident, and employees want to return, GDP will not jump forward. A Pew Research Center poll conducted March 19–24 showed 77% of respondents would feel uncomfortable eating at a restaurant and 42% going to a grocery store. Getting to that point requires real progress on testing, treatment, and further down the road: vaccination. Without developments on the science, reopening will only provide limited economic success. After all, you can’t force consumers to go to the movie theater, out to a restaurant, or even send their children to school if the risk is not worth the reward, particularly given cyber alternatives.

Please see important disclosures at the end of the article.

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