Sectors' return differentiated, while risk remained

The S&P 500 looks to be pricing in a V-shaped economic recovery, with S&P500 gaining 19.95% this quarter, but the sectors performance told a more differentiated story. For example, online retailers were up very strongly year to date, while department stores were down sharply, along with other sectors that had been most affected by the virus, such as hotels, airlines, retail REITS, energy companies and banks. Risk remained, as incomes had so far been supported by stimulus and unusually generous unemployment benefits, which should be expired at the end of July. If these benefits were not extended, many unemployed Americans could experience a significant reduction in their incomes in the second half of the year. Political uncertainty came with the US election fast approaching and tensions between China and the rest of the world escalating.

Although credit markets had received support, as central banks introduced new programs to either buy corporate bonds directly or allow some corporate bonds to be repo‑eligible collateral, there had nevertheless been considerable stress. As a result, investment-grade credit spreads were generally wider today than they were at the end of February, when the crisis began. Most sectors were suffering from a reduction in revenue, profitability and free cash flow. It became harder to generate positive cash flow for small business, and Credit market issuers were somewhat polarized. Higher-quality investment-grade companies had a better chance of weathering the storm given their access to cash, bank credit lines and capital markets. Given this last credit cycle was one of the longest on record with almost unlimited access to liquidity, some companies would now struggle to refinance and stay solvent. So not only was there likely to be more credit rating downgrades but also an increased in defaults. However, defaults, consistent with history, could remain concentrated in already lower-rated high-yield companies.