April 7, 2020
The COVID-19 impact on human life, the economy, and markets remains substantial. Many lives have been turned upside down. Uncertainty remains high regarding the trajectory of the coronavirus and how soon we will all be able to go back to our normal lives—whatever normal looks like in the future.

The containment efforts have led to the shutdown of large swaths of business and have caused a devastating blow to the global economy. In the upcoming quarter, it is plausible that the US economy sees its sharpest quarterly decline in activity since WWII. The unemployment rate is set to shoot up while corporate profit estimates are aggressively cut.

While the data will be challenging, this is no longer a surprise for investors. And the good news is we are starting to see tentative signs that the containment efforts are helping to flatten the curve. While the timeline remains uncertain, we are optimistic that we will get through this as the medical community and vast government resources around the globe are collectively focused on finding a solution. Moreover, governments and monetary authorities are responding to the current crisis with unprecedented vigor. In the US, the amount of fiscal stimulus and speed at which it was enacted dwarfs the action seen in 2008. While stimulus cannot fix a health crisis, it can help to blunt the downside.

From an equity perspective, this fiscal and monetary support has helped reduce the more extreme negative scenario. Moreover, with a peak-to-trough decline of 34%, the S&P 500 at its recent low was already discounting a worse-than-normal recession. Importantly, stocks tend to bottom about five
months before the economy reaches a trough, which we estimate to be in the July/August period (though acknowledge the wider potential outcomes in any forecast). Once stocks find a low, the subsequent turn tends to be very sharp.

Volatility is set to stay elevated but for markets to make a new low from here, the data will likely need to come in worse relative to already depressed expectations. Regardless, we believe longer-term investors who can stomach the volatility are being better compensated for taking on risk today.

We hold an equity bias relative to fixed income. We recently further increased our domestic equity tilt, given our view that US companies are generally in a better position to navigate the downturn. Although we could see a sharp snapback rally in small caps and value style, large cap and growth style is likely to show more sustainable leadership. On the fixed income side, high quality bonds should continue to ballast portfolios. The unprecedented monetary support is helping to thaw the credit markets. We see a relative opportunity in investment grade and high yield corporate bonds for investors with a higher risk tolerance.

Download the full Market Navigator to see detailed information, charts and analysis.