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Investment Commentary




On Hold For More Stimulus

U.S. equity markets have resumed their recovery theme as growth stocks continue to outperform blue chips; and although there has been a plethora of economic data, last week that was eclipsed by big-tech earnings reports.  The current focus has now turned to Washington as Democrats and Republicans continue negotiations on a new virus relief package, but remain far apart on some of the key issues, most notably the extension of the supplemental unemployment benefits which have expired.    

Meanwhile, after hitting multi-year highs back in March and subsequently selling off more than 9% since, the U.S. dollar is signaling caution amidst a backdrop of exploding deficits, zero-interest-rate policy from the Federal Reserve, rising geopolitical tensions, and an uncertain economic recovery.  Given the deluge of liquidity provided by the Fed, the odds of a rush back into the dollar in a risk-off scenario are diminished.  With a weakening growth outlook and rising inflation expectations, real U.S. interest rates (adjusted for inflation) are now negative, exacerbating the selloff in the dollar and helping propel gold to all-time highs.  It is unlikely that this situation will change in the near term given that the Fed remains committed to continuing its asset purchases “at least at the current pace,” and has not ruled out implementing some form of yield-curve control.   In addition, the Fed has discussed tying future rate increases explicitly to actual inflation reaching or exceeding a 2% target which would further support negative real yields going forward. 


The U.S. Dollar Index 

Source: Bloomberg

U.S. 10-Year Real Yield

Source: Bloomberg

Gold Spot Price $/Oz

Source: Bloomberg

In debt markets, a combination of technical factors including a declining supply, Federal Reserve participation, and an abundance of investor cash have all caused spreads to tighten further.  U.S. investment grade borrowing costs are at all-time lows, while high yield spreads have fallen below 500 basis points for the first time since early March.  The amount of distressed debt in the U.S. has declined to about $341 billion as of July 24th, down from a $943 billion high on March 24th according to Bloomberg.

Bloomberg Barclays U.S. Corporate High Yield Option Adjusted Spread

Source: Bloomberg

Economic data continues to be mixed and any meaningful recovery cannot take hold until there is a restoration of confidence in both consumers and businesses.  Despite $1.2 trillion of U.S. investment grade bond issuance so far this year, companies are playing it safe and either sitting on cash or refinancing debt.  As we saw in the 2Q GDP report last week, the decline in consumer spending on services illustrates the caution from individuals in navigating the current landscape.  We’re entering a new chapter of policy-driven financial repression, and the most compelling investment from our standpoint continues to be well-capitalized, innovative companies with stellar balance sheets.       

Ryan Babeuf, CFA

Market Strategist

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continues to bounce back from historically low levels; with this morning’s employment data showing encouraging signs on a standalone basis.  As we saw last week however, markets are beginning to question the sustainability of the recovery following the initial rebound as COVID-19 cases reaccelerate.  This pick-up in new infections has prompted a growing number of states to either stop or reverse their reopenings and some companies, such as Apple, to reclose some stores in certain locations.