Despite extended global challenges in the second quarter due to the novel coronavirus pandemic, US equity markets posted their largest quarterly gain since 1998. Massive government measures to prevent economic calamity are helping, but this bridge to the other side of the virus could give way, so investors should plan for any scenario.
2Q 2020 S&P 500 Index Performance: Biggest Quarterly Gain Since 1998
In US Fiscal Response to the Coronavirus
Revised Global GDP Forecast for 2020
When the COVID-19 pandemic struck, the US launched a massive policy response to slow the virus’s spread, protect people and businesses, and stabilize markets. The Federal Reserve, the US Department of the Treasury and Congress have been joined at the hip—helping to stem job losses, boost consumer spending and bolster market confidence. A market snapback has been accompanied by green shoots of a reopening economy. Projected 2020 global GDP growth is a disappointing –4.7%, but that’s better than were earlier estimates.
There’s a long way to go. COVID-19 cases are up in many regions, record unemployment persists, and political considerations could stall additional fiscal policy support. With the US election cycle heating up, more market volatility is certain, requiring a sharp focus on downside protection. This scenario doesn’t mean it’s time to panic or sit things out. In fact, we see many intermediate-term opportunities that can generate above-average returns across select bonds and stocks without overreaching.
Considering US Treasury yields are extremely low, we think bond investors should broaden their exposure into corporate high-yield, investment-grade and even emerging-market government bonds. High-yield spreads are wide, with select issuers offering strong upside potential. Municipal bonds in certain sectors should benefit from government aid for everything from hospitals to toll roads and airports.
Dispersion in stock returns is at twice the historical average, which we believe gives active stock pickers an edge to find undervalued, high-quality winners. Select international stocks and companies with persistent year-over-year earnings growth are especially attractive now. Small-cap stocks—which have consistently done well during economic recoveries—also offer value opportunities within key industries, like financials and resources.
The battle against COVID-19 still rages, so it’s critical for investors to be discerning and selective. Even after the virus has ebbed, market returns are likely to be moderate—the by-product of slower economic growth, high debt levels, and fewer buybacks and dividends. The overall goal should be to position a portfolio for meaningful upside participation but with some focus on factors and market segments that can provide some insulation from downside.
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Investments are subject to market risk, will fluctuate, and may lose value. Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN) and its affiliates do not provide investment or market research. This material is not intended, and should not be relied upon, as investment or financial advice and does not constitute an offer, recommendation or solicitation of any kind.This overall discussion and any reference to market, market sector or index performance is for informational purposes only. You should contact your financial professional regarding your own individual circumstances. It is not possible to invest directly in an index. Equitable Advisors and its affiliates make no guarantee as to the accuracy or completeness of any statements, statistics, data, opinions, forecasts, or predictions provided herein, nor will this information necessarily be updated or supplemented at any time. International securities carry additional risks including currency exchange fluctuation and different government regulations, economic conditions or accounting standards. Smaller company stocks involve a greater risk than is customarily associated with more established companies. Bond investments are subject to interest rate risk so that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value. High yield bonds are subject to a high degree of credit and market risk.