The market could move up and down by as much as 2% a day for the next few months, according to John Bellows, portfolio manager for Western Asset, a Legg Mason global fixed income investment firm based in Pasadena, Calif.
Investors are aware of this uncertainty in the market, said Bellows. Western Asset is concentrating on time frames that go well beyond the next few months, he said Thursday during Legg Mason webinar on the economy and the recession.
“We are going to get through this and more normal times will return,” Bellows said, but “the legacy of Covid is that economic activity will be down by 5% or 6% even after Covid-19 passes and we will have more debt on both the government and the private sector sides.” Added corporate debt inhibits corporate expansion plans and slows the recovery.
Margaret Vitrano, portfolio manager at Clearbridge Investments, a Legg Mason global asset manager based in Baltimore, agreed the second half of this year will be choppy. The pandemic has accelerated some trends that were already in the works. For instance, consumers’ switch from brick and mortar stores to digital shopping that might have taken five years, was pushed into a few months, she said.
The current economy contains contradictions, explained Jeffrey Schulze, investment strategist at Clearbridge Investments. The markets are up now, but “we have lost millions of jobs. I think we have seen the economic bottom, but we want to see a return of consumer confidence and a lessening of financial stress. This was a quick recession because policy makers were able to short circuit it.”
“Consumers and businesses are learning to deal with the new normal,” added Tim Wang, head of investment research at Clarion Partners, a Legg Mason real estate investment manager based in New York City. “Because Covid-19 is not seasonal like most outbreaks of the flu, this recession may be U-shaped instead of V-shaped.”
Bellows agreed the health and financial problems now being faced can be solved and economic activity will return to normal “at some point. A vaccine for Covid-19 will be part of that. In the meantime, the Federal Reserve Board has provided a bridge for companies that are being harmed,” which is why investors are staying in the market.
However, bankruptcies will remain high, especially for small and mid-sized companies and consumer activity will remain constrained, said Schulz.
Also on the negative side of the economic ledger, taxes are going to increase and social services are going to decrease in the future in order to pay for the economic stimulus packages that have been enacted, said Wang.
Vitrano added that she sees investing opportunities in such things as electric vehicles and the technology that it takes to build them and large cap companies will have an advantage as smaller companies close because of the current economic pressure.
The U.S. presidential election adds an uncertainty to the market, but those questions won’t begin to be built into the market until next month, Schulz said.