At a glance
Markets are rebounding, thanks to significant policy support initiated to combat the global recession caused by COVID-19 pandemic shutdowns. The coming quarters are critical to evaluate how companies, countries and regions are emerging from these recent challenges. Strong market performance in the second quarter implies investors anticipate some progress, although continued central bank support of low borrowing costs should support an ongoing recovery.
Thoughts from our Chief Investment Officer
“These are difficult times, but throughout this period we have found that clients who are grounded in a financial plan – tailored to their unique circumstances – can withstand market volatility within a constant news cycle.”
– Eric Freedman, Chief Investment Officer, U.S. Bank Wealth Management
Quick Take: Measures to combat the spread of COVID-19 drove the global economy into a recession. Ample fiscal and monetary stimulus measures should help the global economic recovery.
Our view: We expect the global recession will give way to a modest recovery supported by reopening economies and ample central bank stimulus.
Quick take: Volatility was a hallmark of trading action in the first half of 2020 and is likely to remain elevated in the second half of the year. The duration and impact of COVID-19 remains unknown, and the path toward normalcy requires more time and is subject to much uncertainty.
Our view: Supportive policy, improving investor sentiment and positive price trends provide a positive backdrop for equities in the second half of the year, despite the absence of a definitive COVID-19 treatment and prevention solutions. The market’s expectation that the COVID-19 pandemic is peaking or contained predicates our “glass-half-full” orientation.
Quick take: We view foreign emerging market equities’ risk and reward as reasonably balanced, while strong policy action and a muted virus response to date supports foreign developed equities’ near-term growth prospects.
Our view: While we must respect the recent recovery in foreign developed equity prices, structural issues such as challenging demographics and less growth-oriented equity markets remain longer-term headwinds. Thematic considerations and China’s ongoing emergence from restrictive containment policies support our balanced emerging markets outlook.
Quick take: The riskiest bonds performed best in the second quarter, clawing back much of their significant losses from the first quarter. U.S. Federal Reserve (Fed) policies helped restore order to riskier markets and boosted investor confidence.
Our view: Lower rates potentially lasting into 2022 and an active Fed create opportunities in high-quality corporate and municipal bonds. Ongoing Fed programs relating to market liquidity and access to capital via debt markets remain important backstops in the event economic recovery falters. Corporate and municipal bond yields compared to Treasuries remain higher than historical norms and significantly higher than the beginning of 2020.
Quick take: Signs of an economic rebound dominated price action in all real asset sectors. The most beaten-up sectors in March led the rally in the second half of the second quarter. Crude oil was supported by a historic production cut agreement by OPEC+ members and production shutdowns domestically. (OPEC+ is the Organization of the Petroleum Exporting Countries plus 10 additional oil-producing nations.)
Our view: Real estate prices are somewhat rich, and current revenue assumptions implied by prices may be elevated. However, property incomes remain solid compared to alternatives. Commodity prices will be sensitive to global economic reopening and the absorption of excess supplies.
Quick take: The policy responses to COVID-19 (social distancing, stay-at-home orders, etc.) caused a divergence in fortunes for businesses that fall into two categories: Companies that mostly require in-person relationships and interactions and those with technology viewed as critical to working from home or providing in-home entertainment.
Our view: We expect market volatility will remain elevated as investors contemplate variables during the gradual recovery. The velocity of change results in disruption and hedge funds may profit by holding the securities of companies expected to succeed and selling short securities of companies expected to struggle.
Quick take: Private markets typically exhibit lower price volatility than public market returns. Active business management capability of investment managers adds greater value during economic slowdowns leading to stronger outperformance.
Our view: Slower economic conditions present opportunities for investing in private equity strategies focused on adding operational value to portfolio companies. Also, secular innovation cycles in the Technology and Healthcare sectors remain intact for private market investors. Private loans with limited protections increased substantially prior to the current slowdown, and the current environment will present opportunity for direct lending at attractive rates of return with investor friendly terms.