by Ivan Martchev

November 24, 2020

I know the daily new COVID cases are hitting records and the hospitals in some states are being overrun with patients, so we have not seen the peak of the dreaded “second wave.” We may see another shutdown, or series of partial shutdowns. It looks like a worst-case scenario and yet the junk bond market – the most sensitive index to improving and deteriorating economic activity – sees a light at the end of the tunnel.

Junk Bond Market Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think the peak in new cases will come either after Thanksgiving or after Christmas, as many Americans seem to be ignoring the calls to avoid travel. The lack of coordination at the federal level in this accelerating pandemic is rather disturbing as it means the peak of new cases will come at higher levels and at a later date, but the junk bond market is like a tired fellow American who wants to go home for Thanksgiving and is looking forward to the end of the pandemic, which will likely come in the middle of 2021 with new vaccines likely being rolled out in mid-December.

The junk bond spread, at 448 basis points to Treasuries, is not “inside 400,” which is boomtime territory for junk bond spreads, but it sure is close. Junk bonds are trading like the recession is about to end.

Dow Jones Industrial Average versus United States Central Bank Balance Sheet Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This chipper attitude in the junk bond market would not be with us without a vaccine and surely not without the Federal Reserve. The Fed balance sheet last week ended at an all-time high of $7.243 trillion and it is not a coincidence that the Dow Jones Industrial Average traded at 29,964, a fresh all-time high.

I think that without the most extreme intervention in financial markets in the Federal Reserve’s history neither junk bond spreads nor the Dow Jones Industrial Average would be where they are today. The Federal Reserve is buying junk bonds outright via Blackrock (BLK), dubbed by Wall Street as “the Fed’s broker.” By injecting excess reserves into the system, the Fed is giving financial firepower to financial institutions. It raises asset prices in the system without fueling out of control money supply growth.

I think all investors would be happy if bear markets were limited to five weeks only, as we saw in February/March this year, but one aspect that would suffer greatly is the price discovery mechanism. The whole point of capitalism is that companies fail, and new ones take over. But because in this case it was not a normal recession but rather a mandatory shutdown, artificial government support was necessary.

I wonder what is coming from the Fed in the next recession, as they certainly have delivered the biggest unelected power grab in financial history during the 2020 recession.

Could This be the Real Turn in Emerging Markets?

One bear market that has been massive and running reliably in the 2010-2020 period is that of emerging markets relative to the S&P 500. It was the 2008 crisis that started to turn the tide against the emerging markets world, so I am wondering if the COVID crisis would help emerging markets turn the corner.

Emerging Markets Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Emerging markets love high inflation, a weak dollar, and strong commodity prices. While we don’t have those conditions now, they could start to materialize in 2021 and beyond, given the Federal Reserve and U.S. Treasury Department policies to tackle COVID. I suspect that the latest improvement in relative performance in emerging markets would stick, and a new bull market in the MSCI EM Index would emerge in 2021 after the end of this pandemic is clearly visible.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
What to Expect this Holiday Season in Retail Sales

Income Mail by Bryan Perry
One Bulldog of a Senate Runoff is Shaping Up

Growth Mail by Gary Alexander
Twenty Reasons to Be Thankful in 2020

Global Mail by Ivan Martchev
Junk Bonds See Light at the End of the COVID Tunnel

Sector Spotlight by Jason Bodner
What is Your Favorite Stock, and Why?

View Full Archive
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About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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