Last week Joe Amato asked whether the shock and awe unleashed by the authorities would be enough to fight the worst effects of COVID-19.
The markets apparently liked it: We got the tenth best day on record for the S&P 500 Index; bond markets began to settle; we managed to put the brakes on the runaway U.S. dollar.
And the shock and awe just kept coming. Fiscal packages grew by the day and the major central banks dropped one limit after another from their firefighting toolkits. On top of all that, influential voices began to argue for earlier easing of containment measures to limit the economic shutdown.
In this environment, it’s easy to assume that a “V-shaped” recovery has begun. The temptation is to rush into risky assets and ask questions later. This backdrop framed the many client conversations we’ve had over the past week, in which the two biggest questions have been, “Should we rebalance into equities now?” and “Where are the really standout opportunities from the sell-off?”
A Two-Step Approach
As we write in our forthcoming Asset Allocation Committee Quarterly, we don’t think we’re there yet. The Committee is cautious in its assumptions about the path and impact of the virus, as well as the state of the markets, and that leads it to favor a two-step approach to navigating the next three to six months.
Step one in our roadmap is to manage for risk over return until U.S. infections have peaked: Remain diversified, retain liquidity, expect high volatility to persist.
We think we will likely see peak infections in May or June. It’s only then that companies may be able to offer guidance that takes account of the impact of both the virus and the stimulus. That may give markets a surer footing, but until then, we think they are vulnerable to another leg down, or at least continued extreme volatility.
Step two, as the recovery comes into sight, will look to add risk with a strong emphasis on quality and yield. For some, this will mean rotating from bonds into equities, but not for everyone. At current valuations, we believe the risk-adjusted return outlook from investment grade credit looks competitive against equities.
Investors can think about reallocating within asset classes, too. Again, at current valuations, lower-risk sectors such as U.S. large company high-quality stocks and investment grade credit may be just as attractive as non-U.S. markets, small caps or high yield.
We believe the time to be opportunistic will likely come much later in the year.
At that point, ideas are likely to come from across all regions and all asset classes, public and private. Some may be distressed, others merely overlooked. We have already been surveying every investment team at Neuberger Berman to build this list of best ideas, and we plan to share it with you over the coming days and weeks, adapting it as market conditions evolve.
Volatility Has a ‘Memory’
Some may view this “safety first” approach to the next stretch as over-cautious. Faced with such a high level of uncertainty, we regard it as prudent. We want to be optimistic about fast containment of this terrible pandemic as much as anyone, but we also need to be realistic.
A key resource that we have in this crisis is our data science team, led by Michael Recce. They’ve been looking at some of the real-time statistics around COVID-19 in the U.S. and the picture looks unsettling.
Far from an early easing of social distancing, they think the U.S. government may need to take “additional steps” for containment to be effective. Their regular check-up on online job postings reveals a steep decline since the end of February.
Norway reports its employment data weekly, and has become a worrying bellwether: The number of people seeking unemployment benefits has already tripled. Last week, U.S. initial jobless claims surged to an almost unimaginable 3.3 million, and the first of the world’s Q1 GDP prints appeared out of Singapore, showing a double-digit decline that outstripped economists’ fears.
These are only the earliest hard data points to show the impact of COVID-19. We believe there will be a drumbeat of similar numbers over the coming weeks. Markets may have priced for some of it already, but there is still scope for shock as the scale of the downturn is revealed.
Even as the uncertainty lifts, it is important to remember that market volatility has a “memory”—it tends not to normalize overnight, but over the course of six months or more. Rebalancing portfolios and seeking out opportunities are certainly what investors should be thinking about now. Should they be acting? We favor a measured approach focused on quality investments. The time for significantly dialing up risk is yet to come.
In Case You Missed It
- Japan Purchasing Managers’ Index: -3.0 to 44.8 in March
- Euro Zone Purchasing Managers’ Index: -4.4 to 44.8 in March
- U.S. New Home Sales: -4.4% to SAAR of 765,000 units in February
- U.S. Durable Goods Orders: +1.2% in February (excluding transportation, durable goods orders decreased 0.6%)
- U.S. Q4 2019 GDP (Final): +2.1% annualized rate
- U.S. Personal Income and Outlays: Personal spending increased 0.2%, income increased 0.6% and the savings rate increased to 8.2% in February
- U.S. Initial Jobless Claims: +3,283,000 in the week ending March 21
- Singapore Q1 2020 GDP (Advance): -10.6% annualized rate
What to Watch For
- Tuesday, March 31:
- Euro Zone Consumer Price Index
- S&P Case-Shiller Home Price Index
- U.S. Consumer Confidence
- China Purchasing Managers’ Index
- Wednesday, April 1:
- ISM Manufacturing Index
- Friday, April 3:
- U.S. Employment Report
- ISM Non-Manufacturing Index
Statistics on the Current State of the Market – as of March 27, 2020
|S&P 500 Index||10.3%||-13.8%||-21.0%|
|Russell 1000 Index||10.6%||-14.6%||-21.5%|
|Russell 1000 Growth Index||10.2%||-11.7%||-15.9%|
|Russell 1000 Value Index||11.2%||-17.9%||-27.4%|
|Russell 2000 Index||11.7%||-23.2%||-31.9%|
|MSCI World Index||10.7%||-14.5%||-22.1%|
|MSCI EAFE Index||11.2%||-14.1%||-23.5%|
|MSCI Emerging Markets Index||5.0%||-16.0%||-24.2%|
|STOXX Europe 600||9.8%||-16.4%||-25.9%|
|FTSE 100 Index||6.3%||-15.9%||-26.0%|
|CSI 300 Index||1.6%||-5.8%||-9.4%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.3%||1.2%||2.7%|
|Citigroup 10-Year Treasury Index||1.8%||3.7%||11.2%|
|Bloomberg Barclays Municipal Bond Index||7.9%||-3.3%||-0.3%|
|Bloomberg Barclays US Aggregate Bond Index||2.7%||-1.0%||2.7%|
|Bloomberg Barclays Global Aggregate Index||3.2%||-2.2%||-0.2%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||7.9%||-11.7%||-13.3%|
|ICE BofAML U.S. High Yield Index||5.4%||-13.0%||-14.4%|
|ICE BofAML Global High Yield Index||5.4%||-13.6%||-14.9%|
|JP Morgan EMBI Global Diversified Index||4.4%||-14.0%||-13.5%|
|JP Morgan GBI-EM Global Diversified Index||3.3%||-10.6%||-14.8%|
|U.S. Dollar per British Pounds||5.2%||-3.3%||-6.7%|
|U.S. Dollar per Euro||3.5%||0.7%||-1.5%|
|U.S. Dollar per Japanese Yen||2.9%||-0.3%||0.4%|
|Real & Alternative Assets|
|Alerian MLP Index||-5.1%||-50.0%||-59.4%|
|FTSE EPRA/NAREIT North America Index||17.8%||-23.1%||-28.4%|
|FTSE EPRA/NAREIT Global Index||14.7%||-22.5%||-28.5%|
|Bloomberg Commodity Index||2.6%||-11.6%||-22.2%|
|Gold (NYM $/ozt) Continuous Future||9.5%||3.7%||6.7%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-4.9%||-51.9%||-64.8%|
Source: FactSet, Neuberger Berman.