April 09, 2020Institutional Investment Management

As we monitor economic activity and the impact on credit spreads, we have seen and will continue to see data that is much worse than any of us have seen before. Equity markets expect this which is why they are rallying today despite a jobless claims report that indicate an unemployment rate of 13% (the peak in ’08 – ’09 was 10%). It will probably go higher in the coming months. Fortunately, the stimulus from both the government and the Federal Reserve has been enormous and swift. In addition, equity markets tend to be looking ahead 6 months and we should be headed in a better place by then.

Let’s get back to the corporate bond market. The following chart shows the spike in credit spreads from 100 basis points to 400 basis points as COVID fears ramped up followed by a decline to 283 basis points currently. Estimates for where this number will be at the end of the year are averaging 300 bps. Economic activity, or the lack of it, will be the main driver.

The S&P 500 has rallied over 12% this week based largely on optimistic virus news and more government/Federal Reserve assistance. The bond market is functioning better than two weeks ago but is far from normal. As we look ahead, it seems we are going to change our focus from a medical one to an economic one. The economy has been closed. People are going to suffer economically and that might dwarf the suffering from the virus. A job gives all of us an identity. I’m a doctor, I’m a chef, I’m a banker. Lose the job, lose the identity.