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May 2020
National Non-Operating Observations
Equities rose across the board in April after suffering one of the most drastic collapses in history in March. Bullish sentiment increased with hopes that the pandemic’s impacts would be less severe than originally predicted. The sharp spike in volatility seen in March subdued throughout April and into early May (as of time of publishing).
However, the recovery in the equities market was in contrast with economic realities in the U.S. By early May, more than 30 million workers had filed unemployment claims. Government-mandated restrictions affected almost all industries, forcing businesses to make major workforce cuts. The U.S. unemployment rate jumped more than 10% to 14.7%, the highest level since the Great Depression. The Bureau of Economic Analysis forecasted that the pandemic’s economic ramifications would lead to a 4.8% GDP contraction in the first quarter of 2020, accompanied by a sharp fall in consumer confidence at nearly 32% between March and April.
Congress and the Federal Reserve continued efforts to mitigate the economic impacts. Millions of eligible individuals received their direct cash stimulus as part of the initial $2 trillion stimulus package. Congress also began to roll out relief measures to small businesses heavily impacted by declining revenues. The Federal Reserve continued multiple aggressive measures begun in March to facilitate market recovery, including municipal bond purchases. The Fed’s seemingly unwavering commitment to Chairman Powell’s March statement that the Fed is “not going to run out of ammunition” continued to excite many investors in April, contributing to the recovery in equity values.
Tensions between the White House and China flared in early May, fueled by rhetoric that the virus’ spread was attributable to the Chinese government’s mismanagement. Trade tensions between the two global superpowers had been on a brief intermission since a January agreement. International tensions and uncertainty around COVID-19’s future implications continue to keep volatility in the equity markets at a historically elevated state. Despite the recent rally, investors remain skeptical, as the market outlook remains highly uncertain.
†U.S. Bureau of Economic Analysis, Q1 2020 “Advance 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

April 2020
Month Over Month Change
Year Over Year Change

GDP Growth
Unemployment Rate
Personal Consumption Expenditures, Y-o-Y
(66 bps)
(215 bps)
30yr MMD
29 bps
(27 bps)
30yr Treasury
(4 bps)
(164 bps)
60/40 Asset Allocation*
Non-Operating Assets
Equities rallied in April on the tailwind of the CARES stimulus package and substantial Fed intervention. The Dow and S&P 500 both saw their biggest monthly percentage gains since January 1987, up 11.1% and 12.7%, respectively. The Blended 60/40 Asset Allocation finished April 7.6% higher, as world stocks rose. The MSCI World Index was up 10.8% and the MSCI Emerging Markets Index rose 9%. The Barclays Aggregate Bond Index finished the month 1.8% higher, up 10.8% year-over-year compared to -1.1% for the S&P 500.
Skepticism appears to be returning to the markets, however. Fed Chairman Powell’s May 13 comment that “the recovery may come more slowly than we would like” sent stocks lower. At publishing time, the S&P 500 was down 3.2% in May and investors have continued to pull money from U.S. equity funds as $8.7 billion of outflows in the first week of May followed $12.3 billion in redemptions the week prior.
Long Term
Last Twelve Months
Non-Operating Liabilities
The 30-year municipal bond rates continued to rise in April, up 29 bps to 2.28%, as investors flocked to the increasingly attractive equity markets. The Fed continued to prop up bond markets and has grown its balance sheet by $2.3 trillion since March. The Fed also held rates near zero, and maintained that this policy will not change in the near future.
As a result, 30-year Treasury rates declined to 1.28%. 1M LIBOR dropped 66 bps to 0.33% by the end of April, aligning with the Fed Funds rate. So far, May has offered no notable difference, as 1M LIBOR now sits at 0.18%, a low last seen in 2014. The tax-exempt short-term rate SIFMA finished April with a staggering drop of 449 bps to 0.22%—one of the sharpest declines on record. Like 1M LIBOR, SIFMA declined further to 0.19% as of market closing on May 12. Short-term indices are expected to remain in this range, as long as the Fed maintains its 0.00%-0.25% range.
Municipal fund flows returned to a semblance of normalcy, with $3.8 billion in redemptions in April. While negative, the outflows are nothing like the $42.1 billion in outflows observed in March. Municipal bond funds reported $408 million of net outflows for the week ending May 6.
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, 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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