Q2 2020 Investment Outlook

EXECUTIVE SUMMARY

Efforts to contain the spread of the COVID-19 virus abruptly plunged the economy into a likely recession and sent financial markets reeling to end the longest expansion on record. Facing tremendous uncertainty, many investors raced to reduce risk and increase liquidity, causing broad declines in nearly all asset prices [Exhibit 1].

Global monetary and fiscal authorities have reacted swiftly to support individuals and businesses and keep financial markets operating. Investors seem to have taken heart, as asset prices firmed through early April.

Given the uncertain outlook, we have generally positioned portfolios with a conservative posture and an eye on future investment opportunities.

• Cash – above average levels for liquidity and to be opportunistic
• Equity – underweight given high volatility and greater downside risks
• Fixed Income – low rates are unattractive long term, but warming to credit
• Complements – adding where appropriate

Economic Outlook

• Economic impacts from the global health crisis are nothing short of staggering. As the U.S. economy convulses and contracts, unemployment levels may reach 20%.
• Around the world, central banks and governments responded with policies unprecedented in their scale.
• In the U.S., the Federal Reserve quickly implemented essentially its entire 2008 crisis playbook—and then some.
• On the fiscal side, the $2.2 trillion CARES Act may be followed by hundreds of billions of dollars of additional stimulus and aid.

U.S. Equity Outlook

• The S&P 500 Index of U.S. large-cap stocks declined -19.6% during the first quarter, making it the worst quarter since the end of 2008. The decline into bear market territory was the shortest on record.
• U.S. large-cap growth stocks showed more resilience than other areas of the stock market, thanks to stronger balance sheets and lower economic sensitivity.

U.S. Fixed Income Outlook

• Like stocks, the reaction in the bond market was also dramatic. Investors fled to U.S. Treasuries and cash while prices in credit markets became untethered from fundamental values.
• To address the ensuing liquidity crisis, the Federal Reserve went “All In” to support smooth market functioning and facilitate the availability of credit during the COVID-19 shutdown.
• Pockets of value are now emerging and, for investors who understand the risks, these may present attractive opportunities.