Highlights
• This recession will be unprecedented: deep, painful and rapid. On a positive note, the slowdown is not coming from structural imbalances and policymakers around the world are responding swiftly. We expect growth will start to recover later this year and into 2021.

• Stock markets are likely to remain volatile, and we’ll likely retest the lows from a couple of weeks ago. But we also believe prices will be higher one year from now, which could create buying opportunities.

The global economy is in the midst of its worst shock since the 2008 financial crisis (and maybe since the Great Depression). It’s too early to know how bad this will get, but policymakers are deploying every tool available, showing their willingness to do “whatever it takes.” Governments are easing fiscal policy and launching extensive stimulus measures. We expect U.S. and global growth will contract significantly for a couple of quarters before recovering rather quickly.

Central Bank Policy To The Rescue?
Nearly every central bank in advanced economies has cut interest rates to zero or below as the reflation move takes hold. More importantly, central banks have become the lenders of last resort. The Federal Reserve announced it will engage in unlimited asset purchases, has opened various facilities to provide liquidity to the market (some from its 2008 playbook and some new) and is using the Treasury Department to lend directly to the private sector.

These actions have three objectives. First, they are designed to alleviate the global economy’s cash crunch. Second, they support growth directly by providing cash inflows to a private sector that sorely needs it. If policy actions can help individuals and businesses survive in the immediate term, then spending hopefully won’t collapse as deeply or as long as would otherwise be the case. And third, policymakers are working to boost confidence and ease financial conditions to allow fear to recede.

The Recession Will Be Broad And Deep—But Hopefully Brief
We see two key economic unknowns: how long the economic slump will last, and how quickly activity can return to a semblance of normal. We take solace in the fact that most of the major world economies were in decent shape before the COVID-19 pandemic and this current crisis was not caused by broad structural economic problems. At this point, we anticipate growth resuming later in 2020 and into 2021, and thus a better and more stable backdrop for equities and credit.

In any case, though, we doubt that the world as we knew it will fully return to its starting point. We’ll likely see long-term behavioral changes regarding job security, upward pressure on the personal savings rate once employment conditions improve, fears of a repeat into the next flu season, changes to global supply chains and the impact of unprecedented public sector budget deficits. And questions remain about what this means for future taxation and the role of governments in our everyday lives.

Equities: Expect More Pain, But Also Long-Term Opportunities
After the quickest bear market in history (down 20% in 16 trading days), the equity market staged its strongest three-day rally in 89 years (up 20%, erasing 37% of the bear market decline).¹ The short-term bounce came from deeply oversold conditions and massive policy reflation, but sustained upward movement doesn’t yet seem likely.

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