Central banks are fully engaged in promoting liquidity, and we are seeing signs of easing selling pressures and narrowing credit spreads. A bumpy path looms, as grim economic data, corporate news and earnings reports have yet to begin in force. Investors will be prone to cautiousness as bad economic news arrives.
From a sentiment perspective, deeply oversold conditions and extreme pessimism are a necessary but insufficient condition to launch a sustained rally. Investors also need to see prospects for better earnings ahead. These conditions do not yet exist, nor are they likely to come about it in the near future. While the short-term outlook remains murky, we think equity markets will begin to move higher in force when more clarity emerges. As such, we think those with long-term time horizons who can tolerate near-term price swings should consider allocating into equities at the expense of bonds.
Ten Observations: Where We Go From Here
1. The number of COVID-19 cases and fatalities has not yet plateaued.
2. We are about to witness absolutely horrific economic data.
3. This is a painful exogenous shock, not a systemic structural break like 2008 or 1929.
4. The key to sustained economic improvement is not more fiscal or monetary policy, but a peak in the number of new cases.
5. Economic recovery will be aided by the largest blast of policy stimulus any of us has ever seen.
6. Equities have likely seen their primary low and are now in a volatile whiplash pattern. We think a secondary low is likely.
7. Stock prices and interest rates will likely be higher one year from now.
8. No one can pick bottoms and tops, making dollar-cost averaging into and out of positions important.
9. Information technology and health care have historically outperformed in quantitative easing environments, while utilities and REITs have lagged.
10. Watch coronavirus data, credit spreads, the yield curve, copper prices and weekly jobless claims for clues to future market action.
Robert C. Doll, CFA, is senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet