DDJ Capital Management Blog

March 27 - April 2, 2020

Last week, markets received two “shots in the arm” in the form of unprecedented fiscal and monetary stimulus. In our view, the CARES Act, which was signed into law by President Trump on March 27^th and is expected to provide the economy with a $2 trillion stimulus, has done more to stabilize leveraged credit markets than any actions thus far taken by the Fed, as such legislation more directly addresses the macro and fundamental challenges presently facing high yield companies. That said, the Fed’s recent actions, which have included several lending facilities designed to provide support to numerous fixed income markets, has also helped further stabilize the high yield and leveraged loan markets. Largely as a result of these actions, high yield bonds and leveraged loans rallied between March 23^rd and March 31^st.  This rally included the best five-day return for the high yield market dating back to 1996, even eclipsing any five-day rally witnessed during the 2008-09 Great Recession and its ensuing recovery.

However, following a sobering press conference delivered by the White House Coronavirus Task Force on the evening of March 31^st in which Americans were warned to essentially prepare for the worst over the next couple of weeks, market sentiment soured considerably. As part of this update, the federal government extended its guidelines for social distancing and mitigation efforts through April 30^th, with many states and local governments decreeing similar policies.

March 20 - March 26, 2020

On Thursday, March 19^th, in an effort to mitigate the burgeoning COVID-19 outbreak, California enacted the strictest state “lockdown” to-date, with similar actions then followed by multiple other states over the next few days. As a result, the economic implications associated with the essential closure of large parts of the U.S. economy have begun to set in. Meanwhile, in Europe, new COVID-19 cases and fatalities continued to increase at an alarming rate, an ominous sign for the U.S., which is believed to be a few weeks behind Europe in terms of progression of the virus. Major investment banks, such as Goldman Sachs and Morgan Stanley, slashed their U.S. economic growth estimates, with such firms now expecting record declines in second quarter 2020 annualized GDP of -24% and -30%, respectively. On Monday, March 23^rd, in response to the deteriorating economic outlook and declining liquidity across multiple sectors and markets, the U.S. Federal Reserve announced an expansion in both the size and reach of its asset purchase program as well increased direct lending for small and medium-sized enterprises, with a pledge to do more as needed. Despite these actions, the failure of Congress to pass a stimulus package over the weekend contributed to a down day across risk markets to begin the week. In our view, with significant uncertainties regarding the length of state lockdowns and the size of the total fiscal and monetary policy response, DDJ believes that it is still premature to forecast the economic impacts of the current crisis over the next three-to-six months.

March 13 - March 19, 2020

After a tumultuous five days of market activity ending Thursday, March 12^th, the high yield bond and leveraged loan markets were enjoying a day of moderate gains and relative calm last Friday. Subsequently over the weekend, several actions taken by various levels of government led market participants to conclude that the COVID-19 outbreak would begin impacting economic activity far more tangibly than perhaps originally contemplated. The unexpected announcement by the Federal Reserve, which included a reduction of the Fed Fund’s rate to near zero as well as the re-initiation of its quantitative easing program, further confirmed these fears. These combined events sent equity futures tumbling on Sunday evening. Not surprisingly, when markets opened on Monday, all markets, including the high yield market, reacted negatively to this news. In our view, market participants likely perceived the actions taken by the Fed as a signal that things in the market and economy were much worse than originally thought.