Economic Commentary 2020Q3
Summer is here: Making lemonade out of lemons
The great poet Ralph Waldo Emerson famously wrote, “Do what we can, summer will have its flies.” As we head into the summer months, this mood may best describe nervous investors who recently experienced large bouts of market volatility due to the spread of the coronavirus. The S&P 500 Index fell 34% from its all-time high reached on February 19 to its low on March 23. While it has recovered since then, we are seeing global economic activity reflects the implementation of mandatory “shelter-in-place” policies.
Simultaneously, extreme moves in the oil market — with West Texas Intermediate (WTI) oil futures prices at one point trading in negative territory due to fears of oversupply — caused additional distress in markets.
Globally, central banks and governments stepped up to provide unprecedented levels of stimulus measures on both the monetary policy and fiscal fronts. We see three investment implications from this stimulus. First, we would like to maintain core benchmark holdings and rebalance selectively into risk assets such as credits. Second, we see coupon income as critical in a low-yield world and prefer allocations to corporate credit and even select equity industries. Finally, we would maintain resilient portfolios by focusing on U.S. equities and diversifying perceived safe havens, such as U.S. Treasuries.
Investor risk sentiment began to improve in line with reduced market volatility as a result of policy actions. We see evidence in the high level of dispersion at the industry and country levels as investors refocus on the idiosyncratic stories of each area. Interestingly, megatrends also remain in focus, with infrastructure being one area that is arising frequently in client discussions as a contender for further stimulus measures, especially given its high fiscal multiplier effect and the broad bipartisan support it enjoys.
Meanwhile, our view on momentum has decidedly improved this quarter while we remain cautiously optimistic on the economy. Although recent headlines have warned of a looming global recession, our regime indicator remains in slowdown and we’d need to see growth closer toward zero in order to move to a more negative sentiment.
Blackrock Investment Directions Summer 2020
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