Investing
Key Takeaways
The Fed’s intervention helps ‘buttress’ the bond market
Historic stimulus package ‘builds bridge’ of support
Equity rebound is on ‘the other side’ of the outbreak
Bridges are built to safely transport people over a chasm. In the absence of policymaker action, the US economy was facing a COVID-19-induced chasm. With over 20 states implementing shelter-in-home orders, and even more temporarily closing non-essential business, vast pieces of our economy came to a screeching halt. With economic conditions deteriorating, policymakers responded with speed and precision metaphorically creating bridges to get us to the other side. The US economy will likely struggle temporarily, but the combination of aggressive monetary policy and substantial fiscal stimulus should deter the worst case scenarios from occurring. These efforts will serve as a ‘bridge’ to a place not too far in the future (hopefully June) where the virus is contained, a therapeutic response is developed and the economy returns to normality.
Fed Seeks To ‘Bridge The Gap’ For The US Economy | The Federal Reserve (Fed) has re-implemented programs from crises past and undertaken a series of unprecedented measures to ‘buttress’ economic growth and help credit markets get their ‘bearings.’ After substantial purchases of Treasuries, investment-grade debt, municipal bonds, and mortgage-backed securities over the last several days, the Fed’s balance sheet has reached a record high $5.2 trillion. Although this is below the 2014 peak as a percentage of GDP (24.2% versus 25.3%), Chair Powell’s remarks about the Fed remaining “aggressive” and “forthright” in stabilizing the economy and bond market leads us to believe this record won’t stand for long. This week, we received some of the first economic data points that reflect the negative impact COVID-19 has had on our economy. For example, jobless claims, which had previously trended near 50-year lows, posted a record 3.3 million increase. Unfortunately, this is more than five times the previous historical high of 695,000 set in 1982, and it is no surprise that the virus-impacted sectors such as restaurants, transportation, and entertainment were among the hardest hit. The Fed has acknowledged that controlling the COVID-19 outbreak (through a therapeutic or vaccine) within the US is crucial for the economy to ‘reach greener pastures,’ but it has not and will not cease its tireless efforts to support it with low interest rates in the interim.
Fiscal Stimulus Is Still ‘Under Construction’ | The Senate, House and the president united in a historically rapid fashion to forge a $2 trillion fiscal stimulus package (Phase 3). While the two previous more targeted phases of stimulus, combining for $108.3 billion, are not ‘water under the bridge,’ it was the announcement of this record-setting bipartisan proposal that led the S&P 500 to rally over 17% in just three trading days – the largest three day rally since 1933! Rightfully so, as this round of stimulus is the broadest in terms of scope and the most substantial in terms of cost. In addition to assistance for larger distressed businesses, knowing relief will be provided outright to American families via direct payments and small businesses via potentially forgivable and interest free loans helped restore hope and provided comfort to the markets. The combination of the three stimulus phases thus far will surpass those of both the Great Depression (1933-1939) and the Great Recession (2008-2009). Similar to the Fed, we do not believe this phase is the last. Since the duration of the outbreak remains unknown, we believe there will be mounting pressure for at least a Phase 4, if not more. Items that could potentially be addressed include more consumer debt relief (possibly with mortgages), infrastructure, and additional hospital and logistical support.
A Rebound For Equities Is Not A ‘Bridge Too Far’ | In times of volatility, equity investors need to have a long-term investment horizon accompanied by a disciplined investment strategy as markets are prone to overreact to both the downside and upside when headlines drive both fear and over-optimism. This ‘Black Swan’ COVID-19 event has led to historic levels of volatility, but we continue to recommend investors remain calm and not panic. The rapid decline of ~34% was investors attempting to assess the potential downside risk to the US economy, earnings growth and equity prices assuming worst case scenarios. However, emotionally-driven selling at the recent lows would have resulted in missing one of the most powerful three day rallies on record once aggressive policy decisions were announced. Instead of trying to time market bottoms or allowing headlines to drive portfolio decisions, allow discipline to be the ‘bridge’ between your investment goals and investment horizon. While headlines will continue to induce near-term volatility, we remain unwavering in our expectation that equities will move higher in the next 12 to 24 months. The possibility of the US outbreak “turning the corner” between Memorial Day and July 4th remains the likely outcome, and if it proves prescient, an economic rebound in the latter half of the year should help propel the equity market.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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