Market Direction and Stock Trends

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Fixed Income Thoughts Worth Repeating
By: Raymond James Financial | August 10, 2020

It is commonplace in our industry to make comparisons to the past, mostly in hope that it can guide us to what will happen in the future and thus make our investment choices easier. Despite our attempted due diligence, there are so many variables that prognosticating the future is very difficult at best. There is a reason that documents contain the disclaimer: “Past results are not a guarantee of future performance.” Still, information is important and does contain key indicators to help formulate educated choices. There is no shortage of uncertainty in our current economic environment so recapping some important points may be helpful. We will be diving much deeper on several current topics in this week’s release of the Fixed Income Quarterly (FIQ) and in our monthly advisor Strategy Call this Thursday.

• This recession was started by a medical crisis, not a financial one. There is no gray area concerning whether this has turned into financial adversity…it has! Like it or not, the Fed’s $2 trillion stimulus package likely prevented greater economic misfortune for individuals and businesses alike. If the economy was clear of further peril, there would not be talk of another $1 to $3 trillion additional stimulus. This recession is not finished.
• Interest rates are near historic lows while personal savings are on the increase. This combination lends the Fed’s Zero Interest Rate Policy (ZIRP) ineffective. An ineffective policy may not spur the economy as it is intended.
• The continued low interest rate environment demands that fixed income investors go back to the basics. For years, fixed income investors have reaped the benefits of high total returns. As interest rates continued to fall, prices continued to appreciate. The primary purpose of many fixed income allocations is protection of principal, not income or total return prospects. Allocation to fixed income remains important because principal protection remains important.
• The retiree age group continues to grow. Today’s economic conditions are unparalleled. Low interest rates reduce necessary income for many retirees. The atypical high interest rate period of the 1980s created the sense that retirees need not touch their principal. Many retirees today need to plan more judiciously given today’s economic environment. Creating cash flow via sensible use of principal can be part of a shrewd retirement plan.
• Take what the market gives you. Grouping bonds by troubled sectors and/or negative media assertions may close off opportunities in an environment where any additional income, no matter how small, may be incrementally important to squeezing out improved returns.
• The Fed has just come out and said they are not likely to raise short-term interest rates through 2022. Couple this with huge demand for high quality securities also through 2022 and it opens up an opportunity to exploit. Sell short securities held in the portfolio and push out only slightly to 2023 to 2025. The potential additional income earned over the same holding period timeframe is a welcome benefit in a stingy market.

Keep things simple. Stay disciplined. Don’t fight or predict the market. Take what it gives.

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