Alex. Brown

Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

Weekly Headings

February 14, 2020

Key Takeaways

  • Powell’s semiannual ‘heart-to-heart’ with congress
  • Democratic party yet to choose ‘one & only’ candidate
  • Investors’ love for current equity bull market ‘isn’t blind’

Happy Valentine’s Day! I consider myself lucky to have four valentines: my wonderful wife and my three amazing daughters. I hope that whether you celebrate with cards, chocolate, flowers, or a candlelit dinner, that you’re able to spend the holiday with the ones you most care about. While red may be the color of the day, it’s a color investors have not seen from most asset classes over the last twelve months. For example, the S&P 500 rose ~26% and investment-grade bonds gained ~14%. However, just as in a healthy relationship, we cannot take this excellent performance for granted and become complacent about the future returns we expect to come our way. That is why we ‘wear our hearts on our sleeves’ and continuously provide investors with timely, thoughtful commentary on our views of the US economy and financial markets. This week’s insights include:

  • Powell Maintains ‘Rosy’ Outlook For US Economy | In his semiannual testimony to Congress, Chair Powell reiterated the Federal Reserve’s stance that current monetary policy will likely remain appropriate, especially in light of diminished trade uncertainties. While he acknowledged that the impact of the coronavirus in China has the potential to “spill over to the rest of the global economy,” he highlighted that the Fed will remain patient until the true scope of the virus and its threat to the US economy can be quantified. Chair Powell’s promise to be cautious and diligent, yet willing to act should the Fed’s outlook deteriorate, is consistent with our view that the current expansion is sustainable without further Fed action at this time. While we know this record run (128 months) cannot continue ‘forever and always,’ we are confident that the following two factors will help sustain relatively robust economic growth in the near term:
    1. Labor Market Better Than A ‘Box Of Chocolates’ | Jobless claims remain near the lowest level in 50 years, hourly wages are rising 3.1% year-over-year, and 225,000 jobs were added in the month of January, the second highest month of gains over the last year. Also, the labor force participation rate is at the highest level since 2013, signaling that those previously discouraged in their job searches have found renewed hope.  A heathy job market should continue to bolster consumer confidence and confident consumers tend to spend.
    2. Consumers Splurging On Their ‘Sweethearts’ | Chair Powell specifically mentioned that household spending fundamentals remain solid, evidenced by metrics such as record low debt payments as a percentage of disposable income. With personal consumption expenditures accounting for ~70% of US GDP, we hope consumers continue to have a ‘heart of gold.’ Anecdotally, the National Retail Federation’s expectations for today’s holiday should provide a boost for Q120, with total spending on loved ones expected to reach a record $27.4 billion, up 32% from last year.
  • Still Not ‘Head Over Heels’ For One Candidate | As predicted, Senator Sanders claimed victory in New Hampshire this week, but the better than expected results for both Mayor Buttigieg and Senator Klobuchar are evidence that Democratic voters still ‘have eyes for’ more than one candidate. Ahead of Super Tuesday (March 3), no candidate has yet to breach the 30% threshold, the number of pledged delegates remains tied between Sanders and Buttigieg, and Biden’s decline has certainly not been ‘heartbreaking’ for fellow moderate Michael Bloomberg who continues to surge in the polls. With Super Tuesday just over two weeks away, the probability for the first brokered convention for the Democratic Party since 1952 has moved sharply higher (56% according to PredictIt). The top candidates have signaled they are ‘in it for the long haul’ as they shift their efforts to the later primary states in hopes ‘Cupid’s arrow will hit’ their campaign and help capture the nomination.
  • An ‘Unloved’ Bull Market | The current equity bull market (i.e., rally uninterrupted by a 20%+ decline) is the second longest in history and has been one of the most powerful. Since its inception (March 9, 2009), the S&P 500 has rallied 526%, ‘treating’ investors to annualized performance of 18.3%. But despite this performance, the rally has been ‘unloved’ by investors. In analyzing the fund flows for mutual funds and ETFs over this period, there has been a cumulative $71 billion of outflows from domestic equities. The bond market has seen lower returns (4.2% annualized performance for the Barclays Aggregate Bond Index) but has seen ~$2.3 trillion of inflows, and money market fund balances have soared to ~$3.6 trillion. The lack of unrelenting ‘affection’ for equities has historically been a positive and supports our belief this bull market will continue.

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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.