Highlights

• Negatives: The crisis is getting worse and new cases haven’t peaked. Economic data will be horrific, but not due to structural problems. Volatility will persist.

• Positives: We are seeing the largest blast of stimulus in history. Stocks have likely seen their primary low, and should be higher a year from now.

• Taking action: Dollar-cost average into and out of positions. Be selective (we see opportunities in technology and health care). Watch credit spreads, the yield curve, commodities and jobless claims as clues for future market conditions.

U.S. stocks peaked on 19 February, then plummeted in the deepest and fastest decline to a bear market in history. Last week, prices rebounded sharply, as the S&P 500 Index experienced its largest weekly gain since 1938, up over 10%.¹ At this point, we expect economic data will decline sharply, but we also think we’ve already seen the primary low for this bear market. Clarity will take time to emerge, but we see opportunities at depressed prices.

Ten Themes To Consider

1. Last week’s rally was based on multiple factors.
We’d cite deeply oversold conditions, anticipation of a massive fiscal stimulus package, the Federal Reserve’s announcement of unlimited quantitative easing, President Trump’s comments about “reopening” the U.S. economy and data suggesting new COVID-19 cases in Italy may be peaking.

2. The coronavirus crisis in unlikely to abate soon.
New cases may have peaked in China and Italy, but it may be many weeks before that happens in the rest of the world. Many epidemiologists suggest a peak in the United States in six to eight weeks. Until that time, we don’t expect to see economic data improve.

3. U.S. economic data is likely to be terrible for some time.
The first such data came through last week, with weekly unemployment claims at 3.28 million.² That was the largest number in history by a factor of five, and, by itself, implies a rise in the unemployment rate of 2%.² The widespread panic and virus countermeasures are putting the world into a deep recession. We expect second quarter growth to fall between 10% and 20%.

4. The monetary policy response exceeds the 2008 financial crisis.
The Fed is in a “whatever it takes” mode, both in terms of the sheer dollar figures it will use to purchase assets and the number of new market facilities it has launched.

5. Last week’s massive fiscal stimulus will help, but not solve the economic crisis.
The $2 trillion package includes direct cash payments to individuals, loans to small businesses, extended unemployment benefits, help for distressed industries and the purchase of medical equipment. The relief is targeted at people and companies who have been directly harmed, and while it is big enough to generate faith in an eventual economic rebound, it will not stave off the recession.

6. The oil market crisis will severely damage the energy sector.
The partnership between Russia and Saudi Arabia has collapsed as neither country appears interested in slowing production. Energy companies have been slashing costs and laying off workers. We have already seen credit downgrades in the sector and expect a wave of bankruptcies as debt accumulates and write-downs continue.

7. We think corporate earnings could decline 20% in 2020,
putting earnings at $130 for the S&P 500.¹ We think the biggest hits will occur in the second and third quarters. Fundamental strength in the technology, health care and communications services sectors, coupled with strong balance sheets in the financial sector, should prevent overall earnings from fully collapsing. It’s tough to forecast much beyond that given we don’t know the full extent of economic damage, but an earnings recovery by the end of the year looks likely.

8. The primary bear market low may have been set.
A number of technical factors suggest the primary low for the S&P occurred last Monday, when the index dropped to 2,182.¹ Volatility measures hit an all-time high, we witnessed a massive unleveraging of hedge funds and risk-parity products, ETF volume as a percent of market surged as individual investors sold off stocks in droves, credit-sector funds experienced record outflows into money market funds, put/call ratios reached extremes, and the number of new 52-week lows declined even as broader markets sank.¹

9. We remain in the midst of a bear market.
Looking at severe market declines from 1987, 1998, 2008, 2011 and 2015 shows that these selloffs typically have three phases. The first is a panic-driven waterfall decline marking a bottom (which we think we saw last week). The second phase is a prolonged series of sharp rallies and sharp declines as volatility remains high.¹ That’s where we think we are right now. The third phase is a retesting of the primary low, which could still happen.

10. This is a painful experience for investors, but we see some value in the markets.
At the start of 2020, we thought a long-term, 10-year return expectation for equities of around 5% seemed reasonable given how strongly stocks had rallied in 2019. At this point, we would upgrade those expectations to between 7% and 8% as long-term value has been created. Over the near-term, we’re seeing some extreme valuation spreads in financial markets. The spread between the cheapest and average stock is very wide and the yield advantage of stocks over bonds reached a 65-year high last week.¹ This suggest investment opportunities can be found, but we urge caution and careful selectivity.

Robert C. Doll is senior portfolio manager and chief equity strategist at Nuveen.

¹ Source: Bloomberg, Morningstar and FactSet
² Source: Department of Labor