Global Macro Update: Month Ending June 30, 2020

The following is a brief, hopefully easy to understand, explanation of where we feel global markets presently stand. 

Sector Update

  • The economy is in Sector 4
  • The three month S&P 500 is still trending down
  • The spread between high-yield debt and the 10 Year Treasury Bond continues to widen indicating risk off
  • US Savings Rate continues to increase
GLF_SectorGraphic-03 As of June 30, 2020, the world economy is in Sector 4. Due to COVID-19, corporate growth earnings, along with the US GDP, continues to slow. Inflation is showing signs of reversing from a deflationary environment to an inflationary environment. Monetary policy still is dovish and all signs indicate it will be for the next two years. As the US dollar continues to devalue, commodity prices are increasing, which has a direct impact on the price of goods such as lumber, agriculture, and other items. Yet growth continues to slow.  This maybe the start of a move from Sector 4 to Sector 3 and stagflation or persistent high inflation combined with high unemployment and stagnant demand in a country's economy...remember the 1970s? The high cost of gas and other goods?

Market Trends

S&P February 2020

This is a three year chart. As of June 30, 2020, the S&P 500 is still in a downward trend.  It hit a peak June 8, 2020, and has begun to lose steam and move towards its three year average of 2808.66.
High Yield Spread

High-yield spreads have begun to widen over the last couple weeks. This indicates that the “smart money” is willing to buy 10 year US treasury bonds instead of high-yield bonds even though there is a 8.31% (average of BB, B, CCC rate bonds) better yield in high-yield debt. There is risk off trade in play.

US Savings Rate

Over the last 12 months, Americans have drastically increased their savings rates by 19.75%. This jump started in March as the pandemic began in the United States. The countereffect is on Consumer Spending. Retail sales have fallen during the stay-at-home phase of COVID-19. Unfortunately, this is not good for the US economy. 

What Does This All Mean?

We are at the start of a long road. The closing of the businesses around the world will have long-lasting effects. I am concerned about the corporate debt to revenue ratio as global growth comes to a crawl. 

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stockmarket, Markets, fed, federal reserve, economy, economics, globaleconomy

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