Equity markets bounced sharply off their late-March lows in 2Q as the economy transitioned from its short-lived recession to a new early-cycle growth phase. Concerns over a second wave of COVID-19 and the accompanying economic impacts remain, but between exceptionally supportive fiscal policy and accommodative monetary policy, global governments are doing everything in their power to support growth. With this tailwind we are optimistic on the outlook for further market growth, but expect sector dispersion and individual company dispersion to intensify amid higher valuations and lingering tail-risks.
- Earning estimate declines have stabilized and markets have moved up on optimism of growth in 2021
- Macro data and corporate earnings should continue to improve in 2H20 as the economy recovers and more workers are called back to their jobs.
- Consumer behavior, specifically spending, will be key to sustainability of the market rally and economic growth
- Higher levels of volatility in financial markets is likely to persist creating wider dispersion across sectors and stocks.
- Inflation should remain subdued near-term, but we see increasing chances of a pick-up in inflation in the intermediate-term
S&P 500 Performance (As of 6/30/20)
A sharp and fast recession leads to a new early-cycle growth phase
The first half of 2020 will likely go down as one of the most volatile and unpredictable quarters for markets in history. After the COVID-19 global economic shutdown drove an abrupt global recession and market collapse in a matter of weeks, economic growth and equity markets rebounded as sharply. Unprecedented policy action from every major government and central bank reinvigorated the global economy, provided a backstop for credit markets, and significantly shortened the duration of the recession. The result was one of the strongest equity market quarters in history as investors deployed cash into equities and risk assets amid rebounding consumer confidence, low interest rates and bond yields, and a resumption of business activity.
For the remainder of 2020 we are optimistic that growth can continue to rebound. While we will continue to watch the trajectory of COVID-19 cases, our larger focus will be on hospitalization trends; as long as these remain low we would expect business activity to continue omproving. To that end, we will be closely watching consumer behavior, specifically consumer spending, for signs that the economic recovery is real and sustainable. The speed and trajectory of the economic recovery has already been largely impacted by policy action, and we expect going forward that will continue as well. That said tail-risks still linger, especially as market valuations creep higher and China tensions rise, although near-term we think these will be less important.
Looking ahead we suggest selectively adding risk into portfolios, and re-balancing to strategic asset allocations where needed. With growth improving, and consumer and business sentiment rising, we are optimistic going forward but note that the investment returns are likely to face increased dispersion across styles, sectors, and companies.
Exhibit 1: US GDP Growth Estimates
Following a sharp recession in 1H20 economic growth is expected to jump in 2H20 as businesses and the economy reopen, leading to a new economic growth cycle.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.