What had started as a promising year for growth both here and abroad, turned upside down as the coronavirus outbreak suffocated economic activity in its wake.

The supportive environment for risk assets quickly gave way, causing enormous distortions across both the equity and fixed income markets. The forceful response by policymakers and the reopening of economies has led to a vigorous rebound in the values of stocks and bonds alike. We believe the balance of this year and well into next should build on recent improvements. However, a flexible investment posture may be required given the evolving risks associated with the virus’ uncertain path, Sino-American relations, and a fast-approaching U.S. presidential election.

Overview

  • The National Bureau of Economic Research (NBER) declared that the record U.S. expansion ended in February. A newly minted expansion will likely emerge in the next few months.
  • The fiscal and monetary response in support of resuscitating economic activity has been massive. This will help bridge the economy to a self-sustaining recovery.
  • The amount of stimulus provided on a global basis is remarkable, which should lead to a worldwide recovery albeit one that is starting from an extraordinarily deep contraction.
  • Corporate profits are expected to grow into next year but the pace will be differentiated by sectors leaving some to experience a V-shaped recovery and others more L-shaped.
  • The rally in stock prices since the end of March has been driven by expectations that a resumption in normalized activity is in the offing. That may be quicker than plausible.
  • A therapeutic response is ultimately the necessary ingredient to pass this liquidity-driven phase underwritten by governmentally sponsored stimulus to fundamental growth.
  • We are quite constructive on U.S. stocks and believe leaning into more of a cyclical bias is warranted. This includes Financials, Industrials, Energy, and Materials.
  • Valuations in overseas markets, and economic-leverage of most foreign bourses, emboldens our view that international equities could prosper over the coming year.
  • With the exception of treasury securities, bonds were not immune to the distortion caused by the panic selling that occurred late in the first quarter.
  • Market plumbing problems manifested in violent fashion, leading to plunging interest rates and volatile credit and municipal markets in the first half of 2020.
  • We expect the Fed to pin short-term interest rates at zero for an extended period, but allow longer-term interest rates to drift higher in the second half of the year.
  • Within the corporate markets, triple-B investment-grade names offer the best value, although high yield will begin to offer better value if investment-grade spreads tighten much further.
  • Municipal bonds are relatively inexpensive, and while record-low yields may limit new inflows, reinvestment demand should continue to be supportive through the summer.



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About the authors

Mark Luschini

Chief Investment Strategist, President and Chief Investment Officer, Janney Capital Management

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Guy LeBas

Director, Custom Fixed Income Solutions

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