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Both equities and the bond complex remained in consolidation, trending slightly towards weakness during the last week.
Market participants are keeping close watch on the pace of recovery as states attempt to reboot their economies. Increased activity will likely result in some additional spread of COVID-19. The question is whether the increase in COVID-19 cases will be enough to restrain the acceleration in activity. This is a real concern as many governors are taking a very cautious approach to reopening. The slower the pace of recovery, the more lasting damage to the economy.
As with any recession, COVID-19 induced or otherwise, companies with large amounts of debt on the balance sheet combined with an impaired ability to service that debt are struggling to survive. A notable example from last week is J.C. Penny which filed for bankruptcy. As has been written before, the pandemic response is creating winners and losers. Be careful when selecting equities as deep value can turn to near zero value quickly as in the case of J.C. Penny. In regard to the bond complex, high yield is being actively supported by the Federal Reserve which is something that has never been done before. Visibility into how this will play out is poor. Given that bankruptcies are expected to continue, high yield could easily come under pressure if the Federal Reserve eases support. As such, consider avoiding high yield for the time being.
In the coming week expect further volatility. Additional economic stimulus measures are working their way through congress. An approval of additional stimulus could cause equities to rally. Conversely, in the absence of positive news, market participants could increasingly come to the conclusion that corporate profitability, which will likely be constrained for the remainder 2020 and into 2021, may not adequately support current share prices, leading to equity weakness. During periods of weakness, consider that tech and biotech have done well recently. Although this is not completely unexpected, it does create a situation where tech and biotech equities become vulnerable to sharp pullbacks on negative news.
Best Regards.
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