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April 2020
National Non-Operating Observations
Coronavirus has had wide-ranging and deep impacts on non-operating assets and liabilities in a short amount of time. Healthcare organizations have seen their unrestricted investments drop dramatically in value (before recovering over the past few weeks). Combined with the need to cover excess staffing costs and fund operating losses from delays in elective procedures, this has pushed many organizations to pursue lines of credit and other short-term
liquidity support programs
. Over the medium term, there is concern that the size of unrestricted asset declines and operating losses from coronavirus could push some borrowers into
covenant violations
on their debt tests.
The financial market impact started to build in late February, but the full effects were not felt until March—a month that will go down in history alongside the worst of 1929, 1987, and 2008. Asset classes across the board experienced historic price swings. The Dow Jones Industrial Average declined an incredible 38.3% from its February high to the March low point. In March, both domestic and global equities were hit hard with the S&P 500 falling 12.5% and the MSCI World Index down 13.5%. Fixed income markets also whipsawed as periods of heavy secondary market selling over a short period caused large swings in yield. The less-liquid tax-exempt market dislocated as rates soared well beyond their treasury counterparts.
Unemployment jumped from a 50-year low of 3.5% in February to 4.4% in March as nonfarm payrolls fell by 701,000 jobs in one month. The numbers in April continue to get worse as weekly initial jobless claims show nearly 20 million jobs lost in just the last three weeks. The unemployment number for April will be much worse, with economists projecting at least 17% unemployment, 7% higher than the 10% unemployment seen in October of 2008 during the Great Recession. The St. Louis Fed believes the country is only halfway to the bottom, as they project a potential unemployment rate of 32.1% in June, higher than the worst rate of 24.9% during the Great Depression.
In response, the U.S. government has taken both fiscal and monetary measures to calm markets. The Federal Reserve slashed interest rates to a range of 0% to 0.25%, down from a range of 1% to 1.25%. They also put numerous measures in place, including: unlimited securities purchases (quantitative easing), direct lending to municipal governments, a municipal bond liquidity backstop, lending through the Primary Dealer Credit Facility, backstopping money market funds via the Money Market Mutual Fund Liquidity Facility, expanding repo operations to funneling cash to money markets, direct lending to banks, temporary relaxation of regulatory requirements for banks, direct lending to major corporations, a commercial paper funding facility, loan programs for small and mid-sized businesses, and international swap lines to make U.S. dollars available to foreign central banks.
In addition, Congress passed the $2 trillion CARES Act at the end of March. Unprecedented in size and scope, this amount of stimulus equates to approximately 10% of total U.S. GDP. Provisions specific to healthcare include: a $100 billion public health and social services emergency fund to reimburse providers for expenses or lost revenues attributable to coronavirus, adjustment of Medicare sequestration cuts, expansion of Medicare advance payment programs, enhanced Medicaid funds for states, expanding and strengthening of telepresence, and general business provisions including a delay of employer payroll taxes until 2021 and refundable payroll tax credits for 50% of wages paid by employers whose operations were fully or partially suspended due to coronavirus.
†U.S. Bureau of Economic Analysis, Q4 2019 “Third Estimate” *As of market close, April 17th, 2020 **60/40 Asset Allocation assumes 30% S&P 500 Index, 20% MSCI World Index, 10% MSCI Emerging Markets Index, 40% Barclays US Aggregate Bond Index

March 2020
Month Over Month Change
Year Over Year Change

GDP Growth
Unemployment Rate
90 bps
60 bps
Personal Consumption Expenditures, Y-o-Y
0 bps
10 bps
(52 bps)
(150 bps)
30yr MMD
47 bps
(61 bps)
30yr Treasury
(35 bps)
(149 bps)
60/40 Asset Allocation**
Non-Operating Assets
Concerns over COVID-19 continued to pummel equity markets throughout March, ending the longest-standing U.S. equity bull market in history. The Dow Jones Industrial Average experienced its third largest monthly decline (38%) since the beginning of the 20th century, and the S&P dropped nearly 13% from its record high in mid-February to 2585. Additionally, the price of crude oil plummeted to $20 a barrel, a 20-year low, as the coronavirus pandemic squashed demand for oil amongst continued OPEC production negotiations.
The passage of the CARES Act on March 27 sparked late gains for equity markets. However, the MSCI World Index finished down 13.5%, and the MSCI Emerging Markets Index closed at 15.6%, leaving the Blended 60/40 Asset Allocation lower 8.24% in March, as the Barclays Aggregate Bond Index finished 60 bps lower.
To date, April has seen equities bounce back on the tailwind of the CARES stimulus package and substantial Fed action. At the time of publishing, the S&P 500 is up 11.2% month-to-date, and the MSCI World Index and MSCI Emerging Markets Index are up 6.02% and 4.28% MTD, respectively. The Barclays Aggregate Bond Index rose 1.78%, leaving the Blended 60/40 portfolio up 5.71% so far this month.
Long Term
Last Twelve Months
Non-Operating Liabilities
The Federal Reserve acted swiftly and decisively in response to the spread of coronavirus and its paralyzing grip on global economies. The Fed slashed target interest rates to a range of 0.0% to 0.25%, which sent 30-year Treasury bonds down to 1.32% in March. This decline also was fueled in part by the Fed’s aggressive quantitative easing measures, amounting to $700 billion of bond purchases. Municipal markets dislocated from treasury rates as investors continued to flee from municipal securities, as 30-year MMD rose 47 basis points (bps) to 1.99%. In the short-term markets, 1M LIBOR finished March at 0.99%, down 150 bps year-over-year. The tax-exempt short-term rate SIFMA ended the month at 4.71%, after spiking to 5.2% earlier in March as dealers struggled to clear inventories.
Municipal fund flows reversed a 14-month streak of strong inflows, with $41.8 billion exiting the market in March as investors sought liquidity and fled from nearly all asset classes. The low interest rate environment further fueled investors’ pessimism in the prospects of fixed-income assets as their dire outlook of equities intensified, with $53 billion being pulled from domestic equity funds. This spike in outflow came in response to the heightened volatility in stock markets, with the Chicago Board of Exchange’s Volatility Index recording a high of 85.5 in March, levels similar to those only seen during the 2008 Financial Crisis. March marked 14 straight months of domestic equity outflows.
The devastating impacts of coronavirus on public health and global economies has further crystalized in April. However, investors cautiously regained confidence as Federal Reserve measures began to stabilize markets. The acute dislocation between U.S. Treasury and MMD rates, which had tracked closely for years prior, has become less severe as 30-year MMD has fallen 9 bps month-to-date. The short-term markets have also stabilized in April as dealer inventories cleared, with SIFMA dropping drastically from 4.71% at the end of March to 0.36% at the time of publishing. 1M LIBOR has continued to fall, down 32 bps to 0.67% since the end of March.
Long Term
Last Twelve Months
Note: Taxable and tax-exempt debt capital markets, as approximated here by the “30-yr U.S. Treasury” and “30-yr MMD Index,” are dependent upon macroeconomic conditions, including inflation expectations, GDP growth, and investment opportunities elsewhere in the market. A key measure to track is bond fund flows, particularly in the more supply- and demand-sensitive tax-exempt market. Fund flows are monies moving into bond funds from new investments, and principal and interest payments on existing and maturing holdings. Strong fund flows generally signal that investors have more cash to put to work, a boon to the demand. Fund inflows generally are moderate and consistent over time, while fund outflows typically are large and sudden, as external events affect investor sentiment, resulting in quick position liquidation, which can drive yields up considerably in a short amount of time.
©2020 Kaufman, Hall & Associates, LLC
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