Insights

Pushed lower by monetary policy and direct market intervention (such as asset purchases) by central banks. The result has been that bond holders, who purchase these instruments expecting a steady stream of coupon income, have been forced to accept lower levels of income. Another reason investors purchase bonds is to receive their principal back at a specified time. Unlike stocks, bonds mature and return principal on a maturity date (some bonds have flexible maturity schedules based on “call” provisions that allow the issuer to choose when to redeem the bonds). Unless the borrower defaults – typically a last resort – investors will receive their money back at maturity plus interest earned over the holding period.

Those seeing the glass as half full pointed to better than expected second quarter earnings (reported during the third quarter), meaningful progress on a coronavirus vaccine, continued month-to-month improvements in macroeconomic indicators, and growing confidence that April 2020 marked the pandemic trough. Those on the pessimistic side pointed to widespread COVID-19 case resurgences, questions about the pace of the economic recovery, continued geopolitical turmoil, back-to-school anxiety, election uncertainty, and extended stock valuations when compared to depressed, COVID-impacted earnings expectations.

Six months into the global pandemic, the overall economy is making progress, which continues to be uneven. As restrictions were lifted and businesses reopened over the summer, the economy grew slightly; U.S. gross domestic product (GDP) recorded monthly increases in July and August, according to IHS Markit. However, the trend in growth is decelerating and many Americans continue to struggle. While Wall Street celebrates a strong equity market recovery, many on Main Street America are under significant financial pressure.

However, two IRS Notices published in June relating to distributions from qualified plans may be of interest.

The yield on the 10-year U.S. Treasury Note ended the quarter at 0.65% and after adjusting for expected inflation, yields are negative in “real” terms for high quality government bonds. This means that the purchasing power of the income generated from government bonds will likely fail to keep pace with the increase in the price of goods and services over time. While bonds offer safety in the form of low volatility and return of principal, return on capital will be scarce at best and the expected total return for this asset class will remain quite low. While a low return may be hard to accept, there are several reasons why we continue to own bonds in client portfolios.

While most of the Walt Disney Company’s theme parks remained closed during the second quarter of 2020, global stock markets experienced the rollercoaster ride of a lifetime. In the U.S., the S&P  500 Index increased 20%+ (price plus dividends) during the quarter, rising nearly 40% from the March 23rd low. While now down 3% year-to-date and 8% below the February 19th high of 3,394, memories of the breathtaking 34% decline during the first quarter are quite fresh in our minds. Outside the U.S., the second quarter story was similar, though less dramatic on the upside. Global stock prices, as measured by the MSCI All Country Worldwide Ex-U.S. Index, increased 16%, ending the quarter down 11% on a year-to-date basis.

After a sudden and severe contraction driven by many state government-mandated shutdowns, the U.S. economy rebounded sharply in the second quarter. Amid a race to contain the spread of the coronavirus, the economy nearly ground to a halt beginning in March and is forecast to contract 12.8% from the start of the year through the end of June. Compared to the two prior recessions of 4.0% during the Financial Crisis of 2008/2009 and less than a 1% decline during the technology bubble burst of 2000, March saw the second largest post-war decline in economic output, as shown in the accompanying chart.

There has been much attention paid to key parts of the law that deal with loans to small businesses, and the difficulties that many have encountered in actually obtaining these loans, but there are other provisions that affect a broad spectrum of taxpayers.

Foundation clients of Howland Capital are turning their focus to address the COVID-19 crisis by providing critical support to organizations serving the community. In this time of need, it can be challenging to identify how giving will directly impact those who need it most.

Beyond cutting rates, the Fed also went much further, as we described earlier in this Commentary. It announced several billion dollars of asset purchases – for the first time targeting corporate and municipal bonds in addition to treasury and mortgage bonds. Other central banks around the world have announced similar measures as part of a coordinated global response. The already bloated Fed balance sheet could double from four trillion dollars to as much as nine trillion dollars as it intervenes to stabilize and backstop the bond market. While the Fed’s action echoes the prior financial crisis of 2008 / 2009, the root causes of the problem are different. During the financial crisis, the underlying concern was credit and counterparty risk – the fear that corporations and banks, in particular, did not have sufficient assets to meet their financial obligations. This time, banks are very well capitalized and there is less leverage in the financial system.

Lisa McEwen and her husband welcomed their first child, a baby boy, in November. Everybody is doing well and healthy. Connor Bucklen joined the Howland Capital Team in September. “Upon starting work at Howland Capital six months ago I was immediately welcomed to the team. I feel lucky to have found myself working alongside such a cohesive and highly experienced group of individuals, and I look forward to spending more time as part of the Howland Capital team.”

In the U.S., the S&P 500 Index (price plus dividends) declined 19.6% in the first quarter, and 24% from the February 19th high of 3,394. Outside the U.S., global stock prices, as measured by the MSCI All Country Worldwide Ex-U.S. Index, declined 23.3%.