Skip to content

In the News

COVID-19 Market Stress: Your Questions Answered
Will stimulus work? Will the Eurozone survive? Read our answers to these questions and more.
Quarterly Market Commentary - Special Edition

COVID-19 Summary Investment Outlook: Bazookas and Bridges

A sharp downturn during the first half of the year should be followed by recovery – thanks largely to policy firepower.

As nations around the world work to flatten the curve of the spread of COVID-19, investors are searching for clarity on the consequences for economies, asset classes and portfolios. While there is little doubt that data will reveal sharp declines in the months ahead, it is important to recognize that markets are forward-looking and that policymakers have aggressively mobilized. 

Below is a summary of our expectations for the economy, stocks and credit markets in 2020 as we continue to navigate this period of unprecedented uncertainty.


MACRO OUTLOOK: A CHECKMARK FOR GROWTH

The realities of the COVID-19 outbreak – mitigated by policy measures that recognize the severity of the situation – suggest the following:

  • GDP: Weak 1H 2020 global growth will give way to a slow “check mark” shaped recovery in 2H 2020, predicated on relaxed social distancing but a still-tentative consumer.
  • Near-term inflation: Inflation will fall measurably amid demand destruction, as already suggested by inflation expectations, which reflect disinflation.
  • Longer-term inflation: The longer-term impact of fiscal and monetary policy on inflation will continue to be debated.
  • Forecasts: For more detail on our outlook for U.S. economic growth, read U.S. Economic Outlook: Reality Check from our team of economists

      

Falling Inflation Expectations 



POLICY: BUILDING BRIDGES OVER TROUBLED WATERS

Policymakers around the world are demonstrating significant resolve to mitigate the economic impact of this crisis, including through the following mechanisms:

  • Monetary policy: Global monetary bazookas have stabilized financial markets and provided needed liquidity. Policy makers took “lessons learned” from the global financial crisis and have moved very rapidly.
  • QE infinity: Expansion of asset purchase programs at the Fed has sent a strong signal that policy is fluid and flexible; central bank backstops are in full force.
  • Fiscal frenzy: Aggressive fiscal policy amounting to 4-5% of GDP in developed economies (ex-U.S.) and 10% in the U.S. – aimed at supporting households and businesses during deep downturn – is being implemented, and we expect more to come if needed. Preventing bankruptcies and defaults – and building the bridge to recovery for households – will be critical.


EQUITY FUNDAMENTALS: DON’T BOTHER SHARPENING THE PENCIL

We are bracing for sobering near-term earnings results while looking forward to recovery in 2021. This view is informed by the following:

  • Earnings: 2020 earnings estimates are becoming irrelevant. Results will be terrible, and investors are looking past this expected outcome. We expect nearly 20% declines across global equity earnings-per-share (EPS), with recovery of 22%, 18.4% and 15.5% in 2021 for U.S., developed markets ex- U.S., and emerging markets, respectively.
  • Valuations: Estimated 2021 EPS for the S&P 500 is currently at $160, slightly below the 2019 level. The current price-to-earnings (P/E) ratio is 17.4X, slightly above the 5-year average (16.7X) and well above the 10-year average (15X). However, we believe higher valuations can be supported by extremely low interest rates, a condition expected to persist. Non-U.S. markets are selling well below historical valuation, reinforcing our view that investors should maintain global equity exposure.
  • Dividends: In terms of dividend cuts, we expect, conservatively, a 20% reduction in the U.S., 30% in developed ex-U.S. markets, and 35% in emerging markets. For context, in 2009 S&P 500 dividends fell 22-25%; however, the majority of the fall was attributed to financial services, which are much better positioned today.
  • Buybacks: We expect buybacks to fall to 50% of their peak level. Buybacks had contributed 2% to EPS growth, so will detract from 2020 and 2021 EPS growth – inconsequentially, however, given large expected earnings swings.

 

Stock valuations in context  



CREDIT FUNDAMENTALS: THANK YOU, FOMC

The U.S. Federal Reserve has enabled a full range of firepower aimed at supporting credit broadly: municipal, investment grade, real estate and even high yield credit (through ETF purchases). Policy has also been directed at improving liquidity, and while not at pre-COVID-19 levels, conditions have improved. With this support in place, we expect the following:

  • Investment grade: The investment grade (IG) option-adjusted corporate credit spread (OAS), which measures perceived credit and liquidity risk, has recovered from more than 400 basis points (bps) on March 23 to 261 bps currently. This level reflects the positive impact of the various policy measures put in place but is still elevated relative to the early 2020 level of less than 100 bps. We expect the IG spread to remain elevated, with a forecast of 250 bps.
  • High yield: Current high yield OAS has fallen below 800 bps, far under the nearly 1,100 peak on March 23, but still elevated relative to the early 2020 level of 340 bps. The market is currently pricing in a 9-11% default rate, with most of the defaults in the energy sector. We expect the high yield spread to remain elevated, with a forecast of 750 bps.

Credit spreads in context



Base Case and Risk Case 



DISCLOSURES

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

IMPORTANT INFORMATION

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

© 2020, Northern Trust Corporation. All Rights Reserved.

Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation.

Katie Nixon, CFA, CIMA, CPWA

Chief Investment Officer, Wealth Management
Katie leads the national investment management practice for Northern Trust’s Wealth Management business from the firm’s Chicago headquarters.
;