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].

2020 Q2 quarterly outlook graph

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.

 

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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE