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