The Great Reopening
2020 has been a strange year in so many ways. We are experiencing things in our lives that we never lived through before. On the financial side, having a global economic shut down is a first and the stock markets also responded in unprecedented ways. We experienced the fastest 30% drop in the history of global equities in the first quarter of 2020, followed by the largest 50-day advance in market history in the second quarter. Quite the roller coaster ride.
The US index S&P 500® is almost back to the high it experienced on Feb 19 (YTD up 3.7% on August 7) and the Canadian stock market index S&P/TSX composite is only down 3.04% YTD on August 7th. If you break things down in the US the largest 5 stocks (Facebook, Amazon, Apple, Microsoft, and Google) are up 35% year to date, whereas the other 495 stocks are down 5%. This does make sense. The virus has forced companies to accelerate their technology plans to move towards more cloud-based operations as well as individuals using technology to communicate more.
Source: Russell Investments
“Record levels of fiscal stimulus, sustained low-interest rates and ongoing low inflation create a supportive environment for risk- asset outperformance.” -Andrew Pease, Head of Global Investment Strategy-Russell Investments
There are still significant economic challenges. Markets have rallied on hopes for economic recovery as coronavirus-imposed lockdowns are eased across the globe and governments learned better to manage the virus spread. Another significant contributor is the resources that governments around the world put towards helping their economics and citizens stay solvent. The rebound has been helped by oversold investor sentiment, so what is the forecast?
Here are thoughts from RBC Global Asset Management:
They believe stocks are still undervalued, even after the strong rebound and expect emerging market equities to outperform overall in the coming months if there is no resurgence in Covid 19 cases.
Their view is that stocks will provide superior returns compared to sovereign bonds and that sovereign bonds will not provide the income or risk diversification properties of the past 40 years.
Corporate bonds offer higher yields and widening credit spreads caused by the crisis have bolstered their return potential. The team things exposure to credit if managed properly could enhance portfolios yields and total returns.
As counties ease lockdown measures, the most prominent risk is that the virus regains traction and forces economies into a second closure.
According to RBC, the US is near the top of the list of countries most at risk of suffering a second wave of infection as well as Sweden which did not order a strict lockdown.
In the short term, volatility is likely to remain elevated, but the team believes the worst is behind us.
RBC’s scenario analysis suggests further upside for stocks is possible as long as investor confidence stays elevated, inflation and interest rates remain low, and earnings rebound to their long term trend. The base case outlook for the US is for a 7.1% decline in 2020 GDP. If faster inflation does eventually materialize, the long-established style trend of quality and growth outperforming value investments may finally reverse. The team has adjusted in favor of stocks at the expense of bonds.
Another company Russell Investments had this economic view:
The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of June 22, 2020. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.