COVID-19 cases are spiking and worries over banks are growing, yet stocks continue to hold tough. This week, LPL strategists discuss the growing worries, along with what bond investors should be expecting the second half of 2020.
COVID-19 cases spike
Although the stock market continues to shake it off, the growing number of COVID-19 cases in the United States and globally is quite concerning. As the LPL strategists note, many of the people testing positive now are younger, and the number of people being hospitalized is much less now than it was back in April. Additionally, hospitals are better equipped for this battle than they were three months ago, and the number of deaths are trending lower as well.
Let’s talk about bonds
LPL Research continues to think there’s a place for fixed income in many investors’ well-diversified portfolios, but if the economy continues to strengthen, this could lead to slightly higher rates. The LPL strategists explain that higher rates could pressure bond prices. LPL Research’s 10-year Treasury yield target is 1–1.5% for the rest of 2020, which could put downward pressure on bond prices. We would recommend that suitable investors consider positioning portfolios with below-benchmark interest-rate sensitivity and near-benchmark credit quality. We favor mortgage-backed securities (MBS) for their combination of interest income and limited rate sensitivity.
Are banks stressed out?
The Federal Reserve stress tests revealed some slight concern over the banking group, should the economy begin to deteriorate. As a result, banks can’t buy back shares or increase their dividends in the third quarter. Not being able to increase dividends led to significant selling in some of the larger bank names. The LPL strategists highlight that most banks probably weren’t going to increase dividends now, as they need capital, but the market took this as a reason to sell the group. Overall, LPL Research remains neutral on financials.
Tune in now
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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.
Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio’s credit worthiness, or risk of default.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
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This Research material was prepared by LPL Financial, LLC.
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