Hi there—here is this week's update!
TL;DR - Too Long Didn't Read
-Record-breaking number of daily new COVID-19 cases.
-High-yield bond weakness may be a signal for stock market weakness.
-Stocks are overvalued, but there may be opportunities in other markets if weakness continues.
The U.S. is seeing an increasing number of new COVID-19 cases. Thursday showed a record-breaking 52k new daily cases, and the numbers seem to keep growing.
At this point, we're seeing cities and states pausing their reopening plans and major corporations, like Apple, shutting down stores again.
High-Yield Bond Weakness
High-yield credit spreads have widened over the last month, which means that the high-yield bond market shows signs of weakness. This weakness can be an early warning sign for stocks.
We saw the effects of COVID-19 earlier in the high-yield market than the stock market. High-yield bonds sold off, starting on 1/17/2020, while the stock market started to sell off on 2/19/2020.
We see a slight improvement in economic data; however, the previous economic data was so weak that we don't see this uptick as a longer-term sign of strength. Logically, it makes sense that as soon as lockdowns are lifted, there should be a pick-up of economic activity. This does not mean that economy is in the clear.
The unemployment rate had a slight improvement to 11.5%. The largest contributing factor to this improvement came from hiring back blue-collar workers. The unemployment rate is still extraordinarily high, as the peak unemployment rate during the financial crisis was 10%.
We believe the next wave of unemployment will hit white-collar workers because bankruptcies will continue to pick up in big businesses. Once this happens, we'll start seeing a significant impact on consumer spending, which is one of the main drivers of the U.S. economy.
You can view a list of large bankruptcies from the beginning of the year through today, here.
Blackstone is calling for a "Square Root" recovery, meaning we will have a sharp decline followed by a small bounce and a long recovery back to 2019 highs.
The economic consensus recovery time is about 1.5 years to get back to the 2019 peak, Blackstone is saying that it may take 2.5 years.
We maintain our view that stocks are overvalued.
If high-yield credit spreads continue to widen, this should bring stocks down.
With COVID-19 cases continuing to rise, it makes sense to stay in a holding pattern right now, however, we do believe that there may be opportunities to allocate capital to the high-yield bond market in the coming weeks and months.
You should treat your Round account like your personal investment fund. Now is a time to save and build cash in your account, so it's ready to deploy once the markets weaken.
We hope you have a happy and safe 4th of July. See you next week!
-Saul and The Round Team
Have $100,000 or more to invest? You may qualify for Round Private Client. Contact our team at firstname.lastname@example.org.