May 15, 2020
Dear Clients and Friends:
We hope you and your loved ones are safe and well, coping as best you can with the changes brought about by the coronavirus pandemic. As policymakers discuss the appropriate course for reopening the economy and mitigating both health and economic risks, it can be just as challenging to make personal decisions about how to proceed. Understanding recent volatility in the financial markets may be adding to your sense of uncertainty, we want to share with our valued clients the latest insights from strategists at Raymond James.
The S&P 500 index has experienced declines this week. Volatility can be attributed to a variety of factors, including concerns from national health advisors over a possible resurgence in the spread of the virus as a result of reopening the country too soon, comments by the Federal Reserve chairman emphasizing downside risks to the economy, elevated jobless claims, partisan differences on additional fiscal stimulus legislation and renewed tensions between the United States and China.
“As difficulties in ending social distancing have become more apparent, hopes for a rapid recovery seem to have faded,” Raymond James Chief Economist Scott Brown said.
The S&P 500 had gained 31% over a 26-day period from its low on March 23 – too far, too fast, according to Joey Madere, senior portfolio strategist for the Equity Portfolio & Technical Strategy group. The rally was driven disproportionately by the Technology and Health Care sectors, which buoyed the index amid business closures and decreased consumer spending.
“Given the size and speed of the recovery, it is not surprising to see the recent uptick in volatility over recent days,” Raymond James Chief Investment Officer Larry Adam said. “With equity valuations at multi-year highs, less optimistic messages weighed on the market this week. Volatility will likely remain elevated over the coming weeks and months as the market gauges the scope of the reopening of the economy and awaits a reliable therapeutic or vaccine. Despite this, we believe the trajectory for the market is up over the next 12 months.”
The week’s renewed volatility reflects the short-term uncertainty around the competing needs to reopen the economy and mitigate the spread of COVID-19, the respiratory illness caused by the virus.
“Early indications suggest improvements to consumer activity are likely to be gradual,” Madere said. “We expect volatility to continue, and would use pullbacks as an opportunity to continue to accumulate equities for the longer term. Remember, bear markets are often very fast and violent, whereas bull markets can last for years.”
Congress has provided about $2.9 trillion – equivalent to about 14% of gross domestic product – in fiscal support for households, businesses, healthcare providers, and state and local governments. U.S. Federal Reserve Chairman Jerome Powell indicated further fiscal support will be needed, adding that it “could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”
Raymond James Washington Policy Analyst Ed Mills is watching two developments that may affect markets: fiscal stimulus negotiations and the U.S.-China relationship. Mills views a fiscal stimulus proposal from the U.S. House of Representatives, where Democrats hold the majority, as a starting point for negotiations that could push the next phase of legislative relief response into June.
“Some parts of the Democrats’ $3+ trillion bill could become part of the final package, particularly targeted state aid, healthcare funding and adjustments to small business lending programs,” Mills said. “But the scope of the state aid as currently structured, as well as various other spending initiatives, signal that Democrats and Republicans remain far apart on the core issues.”
Mills also sees signs of escalating tensions in the U.S.-China relationship as a potentially significant risk for the market in the second half of this year should the Trump administration return to its trade-war playbook from before the Phase One agreement reached prior to the pandemic.
“Election year political considerations increase the odds of a return to confrontation in the coming months,” Mills said.
As we all look to stay abreast of the latest developments, we will continue to keep you updated with relevant, and hopefully, useful information. Meanwhile, you can find the latest from Raymond James on the coronavirus and market volatility here.
Thank you for your trust in us.
Sincerely,
Matt Goodrich Larry Goodrich, CFP ®
President, Goodrich & Associates, LLC Vice President, Goodrich & Associates, LLC
Branch Manager, RJFS Co-Branch Manager, RJFS
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Individual investor’s results will vary. Past performance may not be indicative of future results. Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of Raymond James and are subject to change. There is no assurance that any of the forecasts mentioned will occur. Economic and market conditions are subject to change.
Material prepared by Raymond James for use by its advisors.