I thought I would share this article that was on my broker's website. Curious what you all think and what you might do with your portfolios:
March 2, 2020
What coronavirus could mean for the health of the U.S. and global economies
The opinions are those of the author(s) and subject to change.
As coronavirus 2019 (COVID-19) concerns continue to mount, the definitive answers people want most are in frustratingly short supply. And while the immediate and overwhelming focus must be on the physical health of current and potential victims, events of the last week of February demonstrated what's at stake for the health of the U.S. and global economies as well.
The S&P 500 lost 11% of its value, the fastest such drop on record and the worst week since the 2008 financial crisis. Ten-year Treasury yields stood at 1.16% and 30-year yields at 1.67% — both record lows. "An outbreak like this is very difficult to model, especially in the initial stages," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
As we await firmer answers, Hyzy, Michelle Meyer, head of U.S. Economics for BofA Global Research, and Savita Subramanian, head of U.S. Equity & Quant Strategy and Global ESG Research for BofA Global Research, share their thoughts on what to look for in the markets next, and how investors can prepare.
What are the biggest risks right now for the U.S. economy?
Meyer: Looking at the economics of supply and demand, what we've seen so far is a supply shock. With Chinese suppliers disrupted, U.S. companies are worried about maintaining inventories and production. A supply shock alone would be painful but temporary. Companies would absorb the blow, find new suppliers and move on. The longer and more serious the crisis becomes, the greater the danger of a demand shock, where fearful consumers spend less, business confidence drops, and markets suffer even more. A demand shock could be much more problematic.
Hyzy: Coronavirus fears erupted at a time when leading indicators were quickly turning for the better. Amid strong consumer confidence, stock values and corporate profits were rising in unison, the Phase 1 U.S.-China trade deal had helped stabilize U.S. manufacturing, the housing market was robustly recovering, and global economies had bottomed out and were showing signs of improvement. A lot hinges on how quickly health authorities manage to treat and contain the virus.
How has the outlook for corporate earnings and U.S. and global GDP changed?
Subramanian: Before last week we were expecting U.S. corporate earnings to grow by 7% to 8% in 2020. Instead, we might be looking at lower single digits, and clearly the market is already anticipating lower earnings. We're now expecting below-trend U.S. gross domestic product (GD) growth of 1.6% for 2020, and our economic team recently lowered its global GDP forecast by 0.3% to 2.8%. That all sounds bad. But it's important to note that if the virus is contained we could see a surge of pent-up demand for products and services. So while this is not going to be as good a year as we were expecting, we could very well see an earnings recovery in the second half.
What is the likelihood of a recession?
Meyer: Thanks to a still-positive yield curve and strong fundamentals of the U.S. economy, we put the chance of a recession at about one in three over the next year. Will we see one tomorrow? I don't think so. But if this develops into a global pandemic, then a global recession is very likely.
Hyzy: Last week's steep drop indicates that markets are already reacting to that "what if?" scenario, versus what we believe is more likely — the virus will be contained. China's stock market, which declined rapidly three weeks before the U.S. volatility of last week, has already bottomed out and rallied about 14%. Though that recovery remains volatile and in the early stages, we'll be watching U.S. markets for signs of stabilization in the weeks to come. For historical perspective, there have been just 10 instances since 1948 when the S&P 500 has dropped 8% or more over six consecutive days. In each case, a year later stocks were up an average of 20% or higher.
How is the Federal Reserve likely to respond?
Meyer: We believe the Federal Reserve (Fed) will cut interest rates by 50 basis points at its March 18 meeting to help stimulate the economy. If conditions worsen, they could make emergency cuts before then. One thing they'll be watching especially closely is the yield curve. When the yield curve goes negative, that's often seen as a warning sign for recession.
What can investors be doing?
Subramanian: When news comes quickly and markets respond erratically, the most important thing is to stay invested. The best days of market returns typically come after the worst days, and panic selling could cause you to miss out when markets recover. We looked at the data for a hypothetical investment going back to the 1930s. Left alone until today, that investment returned almost 15,000%. But when we omitted just the 10 best days for each decade, the return dropped to 91%.1
Hyzy: Investors should avoid trying to time the markets by anticipating short-term movements and focus instead on long-term goals and objectives. It's especially important for investors to stay diversified and strategically rebalance their portfolios.
For example, amid falling yields, bond prices have risen disproportionately high. In the coming weeks, investors may want to consider using some of those bond gains to rebalance with stocks of large, high-quality U.S. companies that have solid balance sheets and offer attractive dividends. One area to look at is utilities, which have little exposure to global supply chains. However unsettling the coronavirus situation becomes, don't lose sight of long-term drivers of economic growth, such as innovation. We see opportunities in robotics, 5G technology, software and infrastructure, to name a few.
March 2, 2020
What coronavirus could mean for the health of the U.S. and global economies
The opinions are those of the author(s) and subject to change.
As coronavirus 2019 (COVID-19) concerns continue to mount, the definitive answers people want most are in frustratingly short supply. And while the immediate and overwhelming focus must be on the physical health of current and potential victims, events of the last week of February demonstrated what's at stake for the health of the U.S. and global economies as well.
The S&P 500 lost 11% of its value, the fastest such drop on record and the worst week since the 2008 financial crisis. Ten-year Treasury yields stood at 1.16% and 30-year yields at 1.67% — both record lows. "An outbreak like this is very difficult to model, especially in the initial stages," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
As we await firmer answers, Hyzy, Michelle Meyer, head of U.S. Economics for BofA Global Research, and Savita Subramanian, head of U.S. Equity & Quant Strategy and Global ESG Research for BofA Global Research, share their thoughts on what to look for in the markets next, and how investors can prepare.
What are the biggest risks right now for the U.S. economy?
Meyer: Looking at the economics of supply and demand, what we've seen so far is a supply shock. With Chinese suppliers disrupted, U.S. companies are worried about maintaining inventories and production. A supply shock alone would be painful but temporary. Companies would absorb the blow, find new suppliers and move on. The longer and more serious the crisis becomes, the greater the danger of a demand shock, where fearful consumers spend less, business confidence drops, and markets suffer even more. A demand shock could be much more problematic.
Hyzy: Coronavirus fears erupted at a time when leading indicators were quickly turning for the better. Amid strong consumer confidence, stock values and corporate profits were rising in unison, the Phase 1 U.S.-China trade deal had helped stabilize U.S. manufacturing, the housing market was robustly recovering, and global economies had bottomed out and were showing signs of improvement. A lot hinges on how quickly health authorities manage to treat and contain the virus.
How has the outlook for corporate earnings and U.S. and global GDP changed?
Subramanian: Before last week we were expecting U.S. corporate earnings to grow by 7% to 8% in 2020. Instead, we might be looking at lower single digits, and clearly the market is already anticipating lower earnings. We're now expecting below-trend U.S. gross domestic product (GD) growth of 1.6% for 2020, and our economic team recently lowered its global GDP forecast by 0.3% to 2.8%. That all sounds bad. But it's important to note that if the virus is contained we could see a surge of pent-up demand for products and services. So while this is not going to be as good a year as we were expecting, we could very well see an earnings recovery in the second half.
What is the likelihood of a recession?
Meyer: Thanks to a still-positive yield curve and strong fundamentals of the U.S. economy, we put the chance of a recession at about one in three over the next year. Will we see one tomorrow? I don't think so. But if this develops into a global pandemic, then a global recession is very likely.
Hyzy: Last week's steep drop indicates that markets are already reacting to that "what if?" scenario, versus what we believe is more likely — the virus will be contained. China's stock market, which declined rapidly three weeks before the U.S. volatility of last week, has already bottomed out and rallied about 14%. Though that recovery remains volatile and in the early stages, we'll be watching U.S. markets for signs of stabilization in the weeks to come. For historical perspective, there have been just 10 instances since 1948 when the S&P 500 has dropped 8% or more over six consecutive days. In each case, a year later stocks were up an average of 20% or higher.
How is the Federal Reserve likely to respond?
Meyer: We believe the Federal Reserve (Fed) will cut interest rates by 50 basis points at its March 18 meeting to help stimulate the economy. If conditions worsen, they could make emergency cuts before then. One thing they'll be watching especially closely is the yield curve. When the yield curve goes negative, that's often seen as a warning sign for recession.
What can investors be doing?
Subramanian: When news comes quickly and markets respond erratically, the most important thing is to stay invested. The best days of market returns typically come after the worst days, and panic selling could cause you to miss out when markets recover. We looked at the data for a hypothetical investment going back to the 1930s. Left alone until today, that investment returned almost 15,000%. But when we omitted just the 10 best days for each decade, the return dropped to 91%.1
Hyzy: Investors should avoid trying to time the markets by anticipating short-term movements and focus instead on long-term goals and objectives. It's especially important for investors to stay diversified and strategically rebalance their portfolios.
For example, amid falling yields, bond prices have risen disproportionately high. In the coming weeks, investors may want to consider using some of those bond gains to rebalance with stocks of large, high-quality U.S. companies that have solid balance sheets and offer attractive dividends. One area to look at is utilities, which have little exposure to global supply chains. However unsettling the coronavirus situation becomes, don't lose sight of long-term drivers of economic growth, such as innovation. We see opportunities in robotics, 5G technology, software and infrastructure, to name a few.
