The United States
Perhaps the most important Federal Reserve actions in response to the crisis have been the establishment of facilities to support corporate credit – by buying both investment-grade debt, and the debt of “fallen angel” corporates driven into junk status by the effects of the pandemic. That announced support, even before any buying of high-yield debt began, served to underpin corporate debt markets, and allowed a huge issuance of debt — $781 billion between the Fed’s March announcement and the first week of May. The Fed began actual purchases of non-investment-grade debt on May 12.
The effect has been strong – probably it has prevented a financial crisis. Credit conditions, as measured by the elevated spread between corporate debt and Treasury interest rates, remain somewhat stressed. But the Fed has obviously succeeded thus far in creating a financial bridge for U.S. corporates to the other side of the pandemic crisis. Financial firms have been major participants in the wave of debt issuance, but that participation has been widespread across sectors.
Debt issuance has been less robust by the “fallen angels.” United Airlines’ [NYSE: UAL] failed offering shows that there is a level of skepticism for companies in the pandemic’s epicenter that’s difficult to overcome. Stress remains elevated in the high-yield universe, but has come down from sharp highs it experienced before the Fed’s decisive action.
Fed Chair Powell’s remarks on 60 Minutes reminded us of then-ECB President Mario Draghi’s 2012 pledge to “do whatever it takes” to save the euro. The Fed has acted boldly, decisively, and creatively, and has not exhausted its arsenal. Canaccord Genuity’s Tony Dwyer notes: “It is hard to have an overly negative view of risk assets when the folks printing the money are buying them… the corporate credit market has the support of the folks printing the money and they just started buying.” We agree with this assessment.
As the pandemic lockdowns show the first signs of easing in many places, we remind our readers: the monetary and fiscal response to the pandemic have created enormous liquidity in the global financial system, and that liquidity will find its way into financial assets as the public health situation improves and money on the sidelines becomes more comfortable. It seems increasingly likely that the stock market’s response is not an irrational anomaly, but an appropriate reaction to this enormous monetary and fiscal stimulus.
Finding the Winners As Change Steamrolls the Losers
The key will be for investors to position themselves in the sectors and industries that will enjoy the best tailwinds in a post-pandemic world. While the broad indexes such as the NASDAQ, the S&P 500, and the Dow may mark time, experience volatility, or move sideways with relatively limited upside, there will be specific industries and companies within them who will position themselves to address the needs and concerns of this new environment, and will handily outperform. We are concentrated on finding them.
We remain focused on our long-term “usual suspects” – software, the cloud, cybersecurity, biopharmaceuticals, and e-commerce. Investors who have shied away from some of the fastest growers in these industries because of their high valuation may discover that a new valuation framework, more focused on future growth, yields better results in the future.
Gold
Our remarks on gold from last week bear repeating. “The argument for gold in an environment of truly unprecedented deficit expansion is straightforward, and we agree with it. Gold should not be thought of as a substitute for stocks, to which a great deal of liquidity will flow. Still, we believe that a neglect of gold would be foolish for investors at this juncture. We remain bullish on gold.”
We look forward to hearing that you are staying safe and healthy, and taking good care of yourself and your loved ones.
Thanks for listening; as always, we welcome your calls and questions.
Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.
