8. The medical community around the world is racing to produce a vaccine. While technology in this area has certainly improved, we’re going to need testing for safety and effectiveness before we see anything definitive.
9. A market bottom is not an event, but a process. Typically, we see a large sell off on big volume followed by a retest of the lows, as was the case in 1987, 1998 and 2011. This market needs more time to digest.
10. What should investors do now? Nearly 90% of S&P 500 companies offer cash yields higher than the 10-year Treasury yield. Unless you expect a big recession, we believe reducing duration and reallocating some of the money to equities makes sense. The key will be when the number of new coronavirus cases peaks. When that happens, we will likely see stocks up, bonds down, interest rates up, gold down, the dollar down, copper and oil up, and cyclical stocks leading the way.
Uncertainty About The Crisis Persists, But The Global Expansion Should Resume
Capital markets have reacted sharply to the escalation of coronavirus since mid-February. The abrupt collapse in global equity prices and bond yields has been pronounced by any historical standard. As we said earlier, global equities were significantly overbought into mid-February, thereby exacerbating the downside as investors de-risked. While some equity weakness may have occurred even absent this crisis, the extent of the coronavirus outbreak remains unclear and the economic effects have yet to fully play out.
The Fed’s emergency 50-basis-point cut underscores central banks’ commitment to supporting easy financial conditions, but interest rate cuts cannot resolve health crises. Prior to the outbreak, we expected economic growth to firm modestly in the year ahead as manufacturing and trade were gradually improving. Nonetheless, we thought equities had embedded an optimistic earnings outlook, and we advocated only a neutral weighting in stocks.
While many uncertainties remain, we expect the global economic expansion to resume. Growth should pick up in the second half of the year, albeit at a subdued pace relative to prior expectations. While corporate profits will likely be downgraded in coming months, we believe they will subsequently recover. Investors should expect a bumpy path in the near term, as the coronavirus spreads more deeply into the U.S. and Europe. Capital market prices will remain highly sensitive to news flow on the virus, as well as economic and corporate earnings data. In our view, we’re in a bottoming process, having corrected 16% top-to-bottom from the all-time high two weeks ago to last Friday’s close, which is typical of a growth scare.
Robert C. Doll is a senior portfolio manager and chief equity strategist at Nuveen.
1 Source: Bloomberg, Morningstar and FactSet