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June 2020
National Non-Operating Observations
May labor data surprised economists by showing signs of recovery compared to April’s stark downturn. Contrary to expectations, more than 2.5 million jobs were added in May, the largest monthly gain ever recorded. Hard-hit sectors like hospitality and construction posted the greatest gains. More people were able to return to work as many states loosened COVID-19 restrictions, causing unemployment to drop from 14.7% to 13.3%. Misclassification errors noted in the Bureau of Labor Statistics’ June 5 report, however, indicated unemployment could have been as much as 5% higher in April and 3% higher in May, signaling a potentially larger relative recovery in May.
Gross Domestic Product estimates did not improve, with the Bureau of Economic Analysis forecasting 5% contraction in the second quarter. The Conference Board’s Consumer Confidence Index also posted a minimal gain from 85.7% to 86.6%, indicating consumers still fear further economic contraction. Despite the massive federal stimulus, personal consumption expenditures remain subdued due to widespread layoffs and reduced spending, due in part to widespread stay-at-home guidance. The price of WTI oil began May below $20 per barrel, but rebounded to $37.12 per barrel as of market close on June 15. Even so, the past three months of low oil prices, coupled with low consumer demand, have helped to keep inflation in check. Equity markets continued a bullish streak, peaking on June 8 due to the release of the May jobs report, re-openings in multiple states, and news of progress toward a COVID-19 vaccine.
Volatility declined throughout May as investors leveled their expectations of recovery efforts, and took comfort in the Fed’s support. Consistent with previous months, the Fed has continued to supply liquidity by conducting massive purchases of Treasury securities, municipal bonds, and mortgage-backed securities. During the June 10 Federal Open Market Committee (FOMC) meeting, the Fed reaffirmed that rates will remain around the 0-0.25% target “until it is confident that the economy has weathered recent events.” Data released after the meeting indicate interest rates will stay near 0 through 2022, signaling a longer path to recovery than many had hoped.
Tensions between the U.S. and China flared once again in late May. China claimed that the U.S. is escalating relations toward a “new Cold War” through accusations regarding coronavirus and interference in U.K.-China negotiations regarding establishment of a 5G mobile network.
†U.S. Bureau of Economic Analysis, Q1 2020 “Second Estimate” *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

May 2020
Month Over Month Change
Year Over Year Change

GDP Growth
Unemployment Rate
Personal Consumption Expenditures, Y-o-Y
(15 bps)
(225 bps)
30yr MMD
(63 bps)
(67 bps)
30yr Treasury
+12 bps
(116 bps)
60/40 Asset Allocation*
Non-Operating Assets
Equities continued to rally in May, due to substantial intervention by the Federal Reserve and improving economic signals as many states moved to partially resume business. The S&P 500 increased 4.5% in May, continuing its drastic recovery from March’s plunge and leaving the index just 5.8% lower than the beginning of 2020. The Blended 60/40 Asset Allocation finished May 2.5% higher, with the MSCI World Index up 4.6% and MSCI Emerging Markets up 0.6%. The Barclays Aggregate Bond Index finished the month 0.5% higher, and was up 5.5% year-to-date.
Long Term
Last Twelve Months
As of publishing time, equities continued to rally into June before stumbling in response to the Fed’s bearish economic forecast. In early June, the NASDAQ closed above 10,000 for the first time in the index’s history, while the S&P 500 continued to inch toward its all-time-high levels seen before the sell-off from pandemic fears.
These recoveries were largely fueled by investors’ confidence in the Fed’s ability to continue providing liquidity to the market through quantitative easing and low rates. However, investor sentiments soured in response to Fed Chairman Jerome Powell’s statement that the Fed is “not thinking about raising rates—[the Fed is] not even thinking about thinking about raising rates,” signalling the Fed’s uncertain forecast of any near-term economic recovery.
Accompanying cautious economic sentiments are fears of a resurgence of COVID-19 cases. Consequently, the Dow plunged 1,800 points in a single trading session and the market saw a sharp uptick in volatility. The Fed reiterated its commitment to employ its full array of tools to boost the economy, and as of June 15, equities had regained some steam for upward movement after a brutal sell-off the prior week. However, the S&P 500 closed more than 5% below its June 8 peak as bearish sentiments continue to loom in global markets.
Non-Operating Liabilities
Tax-exempt rates stabilized in May as 30-year MMD dropped 63 bps to end the month at 1.65%. The 30-year Treasury finished May at 1.41%. As a result, the 30-year MMD to Treasury ratio of 117% was down markedly from the high of 251% on March 23, but still elevated from the 88% ratio at the start of 2020.
High-grade hospitals have opted to issue taxable debt in the corporate market, which has become more focused on the highest-rated and largest organizations in not-for-profit healthcare. The municipal market has stabilized and is providing consistent execution. Issuers in the low “A” and “BBB” categories have found willing buyers. Recently, issuers such as Frederick Health and Baptist Health completed financings with healthy demand, in a good sign for the municipal market.
In another good sign for the municipal market, fund flows stabilized in May, as nearly $2.5 billion of inflows reversed the trend of outflows following $45.3 billion of redemptions as investors sought liquidity in March and April. In the short-term markets, 1M LIBOR ended May at 0.18%, down 8 bps from April and down 2.25% year-over-year. The tax-exempt short-term rate SIFMA finished May at 0.14%, down an additional 8 bps from April. Short-term rates have continued to drop in June and are poised to remain at historically low levels for the immediate future.
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 signal generally that investors have more cash to put to work, a boon to demand. Fund inflows generally are moderate and consistent over time. 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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