– Fear-induced global sell-off triggered by COVID-19 ends the 11-year-old bull market
– We believe this to be an event-driven bear market, which is often shorter and shallower than ones caused by structural imbalances in the economy
– Economic and earnings estimates will be revised lower, but more meaningful actions in the days ahead by central banks and governments worldwide may potentially provide support
– Market dislocations are creating opportunities at both the asset class and security level
11-Year Old Bull Market Ends
After 11 years, the longest bull market in U.S. history ended, with all U.S. equity indexes falling more than 20% from their peaks in mid-February. Amid the equity market turbulence, investors have turned to the safety of U.S. Treasuries, causing yields to fall to historic lows. Meanwhile, other areas of the fixed income market, such as high yield and municipal bonds, have seen outflows in this risk-off environment.
We believe this virus-driven downturn will follow a similar pattern as previous bear markets driven by exogenous events, such as oil price shocks and wars. Event-driven bear markets have historically been shorter and shallower than those caused by structural imbalances or excesses, such as the dot-com bubble and the Great Recession of 2008.
What We Expect Going Forward
So far, economic data in the U.S. has been holding up relatively well with the exception of manufacturing, but containment efforts may soon impact demand. It remains uncertain to what degree consumers will change their behavior. We will continue to closely monitor consumer spending in areas such as travel, entertainment and dining. While our base case is for an economic recovery in the second half of the year, we have recently raised our probability of recession, now standing at a 35% chance for the U.S. and a 70% chance for Europe. Our belief is that markets may have already fully priced in this worst case scenario.
The degree to which the global and U.S. economy slows will be dependent on the containment of the virus and the responsive actions of governments and central banks around the world.
Our Investment Strategy Committee, which sets asset allocations based on a 12-18 month outlook, has been meeting often since the outbreak of the virus.
We believe that fear of the unknown, rather than a change in fundamentals, is what is causing these severe market dislocations. However, uncertainty has the potential to become self-fulfilling, and as such, we believe it is prudent at this time to have a neutral stance in equities with a bias toward the U.S. While earnings estimates are sure to come down, conversations with our equity analysts suggest there are opportunities to buy high-quality companies with strong balance sheets and safe and attractive dividends at discounted prices. They are looking at hard-hit areas such as travel, hotels and leisure, as well as industries expected to benefit from the virus, including online commerce and home improvement.
There is still much we do not know about this virus, such as how many cases are still undetected , its seasonality and viability in warmer temperatures, whether it's capable of asymptomatic transmission, and the length of its incubation period. These factors may impact the progression of the virus and its economic impact.
We expect that we will have tougher days ahead, both economically and within financial markets. We realize this situation is fluid, with data changing daily. We continue to monitor the steps taken from public health, monetary and fiscal standpoints and will continue to make adjustments to our positioning as warranted.