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Employment, Coronavirus and Triple C’s – Market Messages Abound

CAMS Weekly View from the Corner – Week ending 3/6/2020

March 9, 2020

This past Friday the Bureau of Labor Statistics (BLS) released the employment results for the month of February.  The results were a robust 273,000 new jobs created during the month.  This handily beat expectation by nearly 100,000 jobs.  That is a solid result.

Furthermore, underlining the strength of the employment market, the previous two months were revised notably higher by an additional 85,000 jobs.

Adding these all together the BLS posted a total of 358,000 new jobs created in Friday’s cumulative release.  These totals depict a rock solid employment landscape.

In addition to the above, looking at the Weekly Unemployment Insurance Claims (a weekly tool to help identify if employment is softening) we see they came in at a mere 216,000 for the previous week.  This figure continues to post multi-decade low levels.  For perspective, historically this indicator begins to speak recession concerns when it approaches the 400,000 level – twice the level of current readings.

Enter Coronavirus

Markets have gone full-blown schizophrenic in recent weeks in light of the forward unknown of the Coronavirus.  Highly valued stock markets and forward looking economic uncertainty do not get along and with this the domestic stock market has erupted with fear.

We observe the behavior of many different markets to get a sense of the message they are sending in total.  Historically, the bond market generally is considered one of the smartest markets.

There is an area of the bond market that is not reflecting the fear levels that we would expect in light of the level of concern by overall market participants.


Click For Larger View:   https://fred.stlouisfed.org/graph/?g=qiCu

The above chart depicts the interest rate level (known as yield) of the most vulnerable area to economic downturns within the corporate bond market.  These are bonds that are rated CCC and below.  These pay higher interest rates because they are deemed to be more vulnerable to economic issues – both within their industries as well as to the economy at large.

When the above levels rise it means bond market participants are selling these bonds and in so doing the interest rate rises.  With this, the above spikes and up trends unfold.

There are two red line arrows which depict a notable rise in these rates.  The first arrow was in the fall of 2018.  This was a time when the stock market went down 20% within a couple of months.

This was post mid-term elections and there became an overwhelming concern that the economy was about to fall.  It never did – and markets recovered.

The second arrow reflects a more gradual but consistent trend for a chunk of 2019.  The same growing concern developed but it was more gradual rather than instant via the spike displayed in the fall of 2018.

Enter current day.  The far right of the chart reflects up to Friday.  This highly vulnerable area of the bond market – one of the smartest markets – has certainly risen (i.e. reflecting forward economic concerns) but nowhere near equal to the concerns of say the stock market.  Interesting.

We will watch this closely and will share accordingly.  For right now, the economy is healthy with the employment market being rock solid.  What is interesting is this highly vulnerable area of the bond market is not offering the level of forward fear that one would expect.  Perhaps they are collectively seeing this Coronavirus, within the United States, will not bring on an economic downturn.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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