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Volatility Continues as Fiscal Stimulus Package Takes Shape

“The biggest point we can make is to have patience and stay calm,” says Chief Investment Officer Larry Adam. “There is significant fiscal stimulus coming.”

The economic effects of COVID-19 have accelerated quickly and the financial markets are experiencing heightened volatility. The major U.S. stock indices rise on positive news, such as the president’s call on Tuesday for lawmakers to pump $1 trillion into the economy, and fall when action does not come swiftly or new concerns emerge. On Wednesday, sharp declines triggered a so-called circuit breaker, briefly pausing market-wide trading.

Congress is working on a fiscal stimulus package. The U.S. Federal Reserve has cut its overnight lending rate to essentially 0% and restarted asset purchases, a process called quantitative easing. More importantly, the central bank has made other efforts to boost liquidity and to encourage banks to work with borrowers and use their capital buffers to ease credit strains.

“The biggest point we can make is to have patience and stay calm,” Chief Investment Officer Larry Adam said. “There is significant fiscal stimulus coming.”

The fiscal stimulus discussion includes direct cash payments to individuals, support for small business loans, industry relief for airlines and hotels, other industry support such as tax credits, and changes to health programs, according to Washington Policy Analyst Ed Mills.

“The broad agreement is a positive – the details will be the difficult part,” Mills said.

Chief Economist Scott Brown anticipates there will be a decline in U.S. gross domestic product in the first and second quarters of 2020, though precise projections are challenging to make.

“Economic growth projections have been revised lower day by day and at this point are meaningless,” Brown said. “We do know the impact will be large and unprecedented. The key factors are how much of a hit the economy experiences, how long extreme social distancing lasts, and whether there will be long-term changes in consumer behavior.”

“This is a unique market with extreme volatility and widening spreads and is resulting in different behavior for Treasuries versus the market for products such as corporate and municipal bonds,” Managing Director for Fixed Income Doug Drabik said. “In time, we anticipate that fixed income and its risk characteristics will settle. Despite some of the anomalies, including pricing volatility, fixed income held in portfolios should maintain stable cash flows and income streams.”

Mike Gibbs, managing director of Equity Portfolio & Technical Strategy, maintains caution for equity markets in the near term, but believes the rapid decline that has already taken place will present an opportunity for longer-term investors.

“The Fed is providing the liquidity necessary to ensure the financial markets continue to function properly,” Gibbs said. “The potential for a massive fiscal stimulus package will help cushion the blow we are going to see in the U.S. economy in the next several weeks and possibly months.”

If you have any questions or need assistance with your financial plan, please reach out to your advisor.

 

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.