INSIGHTS FROM FIRST FOUNDATION

A First Foundation Blog

The Week Ahead – Safety Net for Markets

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Despite the coronavirus outbreak being increasingly acknowledged and addressed by businesses as a lingering issue, the U.S. stock market notched new highs during the week, with the S&P 500 gaining around 1.5% over the last 5 days and the NASDAQ up 11 of the last 13 trading days. With equities bouncing back to higher levels than the pre-virus sell-off, it is worthwhile to note the narrowness of the gains: half of the NASDAQ gain year-to-date has come from 4 companies, while the largest 5 companies now account for over 19% of S&P 500 market cap.

While equity markets seem to have set aside concerns over the coronavirus' impact and resumed their resilient run, global rates are now repricing to near-zero, which would historically imply a cyclical slowdown. U.S. Treasuries have been high in demand, with memories of the recession fears that plagued the markets last summer driving investors to the safety of government bonds. Interest rates are now the lowest they have been in all of human history going back 5,000 years, and the market is pricing in further potential cuts to provide support for global stocks should they stumble.

Essentially, there exists strong confidence that central banks will act as a safety net for markets and investors have been conditioned to treat shocks as “containable, temporary and reversible” said Mohamed El-Erian, chief economic adviser to Allianz.  The implication has been to think of everything in the U.S. as a "safe haven." Treasuries, Stocks, and even High Yield Credit have all seemed to benefit amidst the coronavirus uncertainty, as the expectation of substantial monetary injections has continued to fuel sentiment and optimism.

While this "safe haven" sentiment is unlikely to dissipate anytime soon considering the headwinds other major economies are facing, how long before some of the other unknowns intensify investor angst (phase 2, elections, stretched valuations)? How much longer before central banks worry about continued excessive reliance on monetary policy? It's hard to say, but as divergences and weak spots have become apparent in global economic data, caution is warranted – even in “safe haven” U.S assets.

This week features a relatively light economic calendar and much of the focus will be on the index of economic indicators; last month's reading was the worst since 2016. We will also get a report on producer prices - measuring inflation pressures before they reach consumers, some housing market updates with reports on January housing starts and existing homes sales, and the Federal Reserve minutes from its January meeting.

Data deck for February 17–February 21:

Week Ahead chart 2.18.20

 

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at firstfoundationinc.com.  Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Calvin Jones, CFA, Managing Director of Fixed Income
About the Author
Calvin Jones, CFA, Managing Director of Fixed Income