6. The strength of the banking sector is a positive for the U.S. economy. Banking stocks have significantly lagged the broader market in the selloff, amid widespread worries over credit conditions that could cause defaults and loan losses, hurting the banking industry. The ultimate depth of the economic damage remains unknown, but bank stocks are already discounting a grim outcome. Banks remain well capitalized, however, maintaining their strongest balance sheets in several decades. The financial system is significantly more resilient than during the financial crisis a decade ago.
7. The ongoing turmoil has hurt President Trump’s reelection prospects. According to the PredictIt predictions market, Donald Trump’s reelection probability was 59% at the market peak, but has since fallen to 46%. Prior to the coronavirus, Republicans hoped to retake the House of Representatives. Now, Democrats are eying the possibility of taking both the White House and Senate.
8. Market technicals suggest the start of a bottoming process. Last Thursday, the New York Stock Exchange saw over 1,300 new 52-week lows, on par with some of the most significant market bottoms over the last 75 years.1 Put/call ratios on Thursday were also historically low, a sign of peaking bearish sentiment. The sharp bounce on Friday is also part of a familiar multi-week pattern during which markets retest important lows. This happened during the market bottoms of 1987, 1998, 2008, 2011 and 2015.1 While it is too early to tell, we think the bottoming process is starting. Market bottoms are a process, not an event. This will take some time.
9. More volatility is likely, but stock prices could start to climb this year. The S&P 500’s low last week was 2,478, higher than the December 2018 low of 2,346.1 We expect markets to retest last week’s low, but unless corporate earnings expectations deteriorate more seriously, we think testing the 2018 low is less likely. While we think volatility will remain elevated, we expect markets to move more sideways with both selloffs and rally attempts. We think the S&P 500 could end the year around 2,950, or slightly lower at 2,750 if the economic and earnings damage is more severe than we expect (Friday’s close was 2,711).1
10. Now is not a time to abandon long-term investment plans. For investors who had previously planned to buy or sell stocks, we suggest continuing to dollar-cost-average into and out of the market. Within the markets, some shifts in relative value that could affect buying decisions. The widespread price dispersion between sectors and individual stocks makes security selection critically important. In particular, we see significant price advantages in value styles, which could be poised to pop when markets eventually recover. Additionally, we suggest focusing on those companies with pricing power, the ability to put free cash flow to work and the potential to grow their dividends.
Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet