The rate of new daily cases has continued to slow in the US and Europe, even as economies started to reopen. Global risks have shifted as EM countries have reported relatively high growth in new cases. A second wave remains one of the risks while prospects of a vaccine are a basis for optimism. Read More
A clearer view of the virus shock based on real-time activity and insights to the reopening process has made the case for a more “V”-shaped recovery in quarter-on-quarter terms. In the US, a deep hit in Q2 (-36%), followed by a quick recovery in Q3 (+29%) would amount to a -5% decline in 2020 GDP. In Europe, economic outlooks are uneven as countries have emerged from the coronavirus crisis asymmetrically. As a whole, euro area GDP may fall -11% in 2020 and global GDP may contract roughly -4%. Read More
US stimulus may be more than $3.6T in 2020 (~18% of GDP) through the $2.6T in enacted discretionary easing, $500bn in automatic stabilizers, and another $535bn in easing from a “Phase 4” bill likely in late June. In the UK and Euro area, policy may be closer to 10% of GDP, with a larger component in automatic stabilizers such as unemployment and wage subsidies. Still, Japan’s ¥200T package (40% of GDP) will be by far the most substantial. Read More
Aggressive monetary policy globally (rates cut to ELB, forward guidance, asset purchase programs, credit facilities) has largely been effective and will likely continue going forward. Considerations on the US or UK deploying negative rates is not warranted yet – but a shift to demand collapse, ineffective fiscal policy, or asset purchase insufficiency may change that view. Read More
Policy support and medical progress have pushed equities higher, but near-term repricing may be likely for a few reasons: 1) COVID-19 cases have remained on the rise and reopening could bring another wave of infections, 2) corporations seeking to preserve liquidity via dividend cuts and a halt to share buybacks could stall net demand, and 3) politics may reintroduce higher taxes in the US and a resurgence of US-China trade rhetoric globally. Read More
A lack of Fed backing for a negative policy rate may mean that rates are already at their lower bound. A move to reopening may end central bank actions, and push yields on government debt to move higher given the current excess supply. Meanwhile, prolonged supply chain issues and higher oil prices may pressure inflation upward as well. We forecast the 10-year US Treasury to end 2020 at 0.75%. Read More
A surge in IG issuance and clarity around the Fed’s lending terms in the secondary market may slow the pace of spread tightening. In HY, lower-rated borrowers may still be challenged by stretched balance sheets, greater cyclical exposure, and the twin oil-virus shock. We prefer defensive positioning at this time. In the municipal market, the municipal lending facility will also operate as a final backstop, though the market expects the majority of issuers will not require support. Spread normalization in the asset class may persist. Read More
A rebalance of supply/demand has lifted WTI oil prices this month though the risk of a supply spike from shut-in producers could spur volatility again. Even so, the massive inventory overhang will take time to clear. In the long run, structural repricing should push prices to $60/bbl in 2022. Read More
The significant rebound in equity prices has already moved S&P 500 levels above our year-end target of 3000. While the rally may continue to carry on, current risk appetite metrics tell us that the upside may be limited absent a sustainable cyclical boost. Additionally, dividends and buybacks are at risk for this year, suggesting investors may benefit from looking beyond traditional core assets. A mix of income generating assets may provide investors with attractive return potential at historically lower volatility.
The equity market recovery has been extraordinary in both speed and scale. Both fiscal and monetary policy appear to have removed left-tail risk, contributing to a rally of more than 35% from March’s lows. So far, the rally in risk assets has been defensive in nature suggesting that broader macro improvement is needed to sustain meaningfully higher returns.
The swift market moves have been mirrored by an equally quick recovery in the risk appetite indicator (RAI) – a collection of data on market views, fund flows, futures positioning, and risk levels. Historically, such a rapid reversal in RAI has preceded more moderate 12-month equity returns with less consistency of positive outcomes.
With lower equity returns on the horizon, investors may benefit from the addition of income strategies to their portfolios as an alternative source of return. A combination of cash flow enhancers may lower risk in a portfolio and yield a potential distribution above 4%, which outpaces both equity dividends that will become challenged by cuts and Treasury yields that are anchored by low rates.
Top Section Notes: As of May 26, 2020, latest available data. Analysis shows the daily performance of bear markets based on the MSCI World Index for the year prior and following a bear market trough. ‘Current’ refers to the most recent bear market in March 2020. ‘Average’ refers to the average market performance based on bear markets in the post-war era. Middle Section Notes: As of May 1, 2020. ‘Risk Appetite’ refers to the Goldman Sachs Global Investment Research Risk Appetite Indicator. Bottom Section Notes: As of May 29, 2020, latest available. A Buy-Write strategy refers to an investment that receives call premiums on an underlying equity position seeking to generate income. Additional disclosures presented on page 3. Past performance does not guarantee future results, which may vary.
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