Market Update: Tues, May 12, 2020 | LPL Financial Research


US equities edge higher. Stocks opened higher despite concerns of a second wave of COVID-19 cases as the US economy begins to reopen. Asian markets were lower, led down by Hong Kong, Taiwan, and Australia. European markets were mostly higher, led by the United Kingdom and Spain, while France’s CAC lagged. WTI Crude is continuing its impressive run, with the June futures contract about 5% higher this morning on news of more Saudi output cuts.

Fed buying corporate bond ETFs. The New York Federal Reserve (Fed) said its Secondary Market Corporate Credit Facility (SMCCF) program will begin purchasing select corporate bond exchange-traded funds (ETF) today. The “preponderance of ETF holdings” purchases will consist of ETFs mainly exposed to investment-grade corporate bonds, with the remainder largely exposed to US high-yield corporate bonds, according to the New York Fed announcement. The program to purchase individual corporate bonds will roll out soon.

Repositioning sector mix. In our May Global Portfolio Strategy (GPS) report, LPL Research downgraded the financials and industrials sector views to neutral to reflect a significantly weaker earnings outlook than previously anticipated and due to the risk of underperformance in a potential market correction. In addition, consumer staples was upgraded to neutral due to the sector’s earnings stability and improved relative valuations. Read all our asset and sector views plus a review of April in the new May Global Portfolio Strategy.

MBS offer a middle way. Mortgage-backed security (MBS) spreads tend to move with investment-grade corporates, but have historically been much less volatile, helping them steer a middle course among the major investment-grade bond sectors. MBS offer more income than Treasuries with lower interest-rate sensitivity, but less credit risk than corporates. With the Fed buying MBS again, prepayment risk declining, and still some potential for spread narrowing based on prior periods of Fed quantitative easing, LPL Research has upgraded its view of MBS to positive. For suitable investors, MBS can play a reasonable lead role in a diversified bond portfolio, as we discuss later today on the LPL Research blog.


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References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Corporate bonds are considered higher risk than government bonds. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

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