November Market Review*
The S&P 500 Index returned 11.8%
The Bloomberg Barclays U.S. Aggregate Bond Index returned .98%
Fed Funds Target Range: 0 – 0.25%
Our title this month is the song we all sing on New Year’s Eve. The poem, written by Scotland’s Robert Burns in 1788, asks us to pause and remember the times and people we’ve known in the past, before we welcome in the new. It seems particularly apt this year.
We should remember and honor 2020 for two distinct reasons. First, to our frontline and essential workers who have somehow kept going while keeping all of us going, the raising of a glass is a symbol of the profound respect and gratitude we all feel. And second, as divided as things may have seemed this year, it turns out we are all more alike than we are different. A nation that collectively turns to baking yeast products at the first advent of a crisis is one thing at heart: Hopeful.
As for the markets, 2020 is one year investors definitely don’t want to forget. The sharp drop and even sharper recovery saw multiple records broken as asset prices recovered quickly and eventually even hit new highs. During the month of November, the S&P 500 closed above 3,600 for the first time, and the Dow Jones Industrial Average broke through the 30,000 ceiling as forward-looking markets focused on vaccines and the formal start of the presidential transition. The market began to price in the onset of a more predictable path in the future.
For credit markets, the nomination of Janet Yellen to Treasury Secretary was reassuring due to her long history in Washington and her relationship with Fed Chair Jay Powell. Bond markets had something for everyone at some point during the month, as first investment grade outperformed all other asset classes, and then high yield outperformed as risk-on sentiment was firmly established and the equity market rally took off
Most sectors saw tighter spreads, with high yield tightening 96 basis points to 412 basis points over Treasuries, which is 115 basis points tighter than the long-term average. By the end of the month, all major sectors turned in a positive return, with high yield and emerging market debt in the lead. While investment grade credit has turned in good performance this year as earlier volatility pushed investors into higher quality assets, the average investment grade yield has now dipped to 1.82%, matching its all-time low.
Leveraged loans continue to recover. The loan market is seeing more stability as the percentage of retail mutual fund holders has declined and the percentage of loans held in collateralized loan obligations (CLOs) has increased. S&P Global Ratings has published an updated default forecast for the S&P/LSTA Leveraged Loan index of 8.0% by June of 2021, which is an improvement on previous forecasts. They also published an ‘optimistic scenario’ default rate of 2.5%, which is essentially in line with historical norms.
Private credit continues to be a source of liquidity for companies that cannot access bank loans or public markets. The ability to access funds is keeping these companies going and helping them position for the recovery. It would appear that investors are finding them useful in their portfolios as well, given that eVestnet reports that year-to-date through November fundraising is up 11% over the same period last year.