The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Midyear Outlook:
- U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
- Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.
- Policy watch: No Fed interest rate hikes until well after the economy has healed.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focusing on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“I knew the record would stand until it was broken.” — Yogi Berra
It pays for investors to keep their balance
It’s too soon for investors to feel comfortable that the worst of the coronavirus pandemic is far behind them, even as new cases in the U.S. fell sharply again last week. But there’s also a danger that people who have missed the rally in risk assets like stocks and corporate bonds since they bottomed on March 23 won’t benefit from future gains. A sense of regret over selling low as the 11-year equity bull market ended abruptly in the early days of the COVID-19 crisis, combined with fear of buying high amid soaring stock prices since then, has prevented many investors from getting back in the game.
Indeed, weekly fund flow data from ICI indicates that individuals continue to pour money into bond mutual funds and ETFs — maintaining a multi-year trend — while pulling billions of dollars out of equity products.7 Institutional investors have behaved in a similar fashion, funneling nearly $100 billion into U.S. fixed income strategies in the second quarter but exiting U.S. equity mandates to the tune of $17 billion in outflows.8
With the benefit of hindsight, we know that the March 2020 selloff created a historic buying opportunity in stocks. Against that backdrop, rebalancing a portfolio to its target allocation of 50% U.S. stocks (as measured by the S&P 500 Index) and 50% investment-grade bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) at the end of the first quarter would have boosted such a portfolio’s 2020 cumulative return by nearly 2%, to 10.2%.9 That’s largely because the rebalancing would have entailed selling bonds and using the proceeds to buy stocks just prior to a massive rally that has seen the S&P 500 surge 57% between March 23 and August 28.10 (Without rebalancing, a 50/50 portfolio left untouched in 2020 would have returned a still-robust 8.3% through August 28.)11
In contrast, investors who dumped all of their stocks at the March bottom, shifting into cash and staying on the sidelines, are still sitting on a 6.5% loss. Even those who sold only half of their equity holdings have suffered, generating barely positive results (+0.9%) for the year to date.12
Looking ahead, there are plenty of potential sources of volatility that might keep reluctant investors from dipping their toe back into the equity pool. Scaling back or eliminating fiscal stimulus threatens the U.S. economic recovery, while uncertainty surrounding a possible government shutdown and the results of the presidential election soon thereafter could roil markets. Additionally, an unraveling of the U.S.-China trade agreement could lead to increased tariffs, which we know from recent experience could send stocks tumbling.
At best, these scenarios, were they to unfold, might offer buying opportunities for investors looking to make up for lost time. But staying on the sidelines expecting or hoping for a dip has been detrimental to meeting investors’ long-term financial goals even in this unusually volatile year.
Strong economic data keeps rolling in, but …
A once-in-a-century pandemic, political gridlock, civil unrest — anyone reading the news lately could be forgiven for not noticing that the global economy is in the midst of a surprisingly strong recovery. The Citigroup Global Economic Surprise Index, a series that measures the extent to which economic data exceeds or falls short of consensus expectations, hit an all-time high this month, led by strong performances in the U.S. and eurozone.
The magnitude of the positive surprises has been impressive, and their breadth across various segments of the U.S. economy is encouraging. Just last week, the U.S. continued its recent run of forecast-topping data:
- Bolstered by record-low borrowing costs, new home sales soared 13.9% in July and a scorching 36.3% compared to a year ago.13
- Pending home sales, a forward-looking indicator of home sales based on contract signings, jumped 5.9% last month and 15.5% versus last year.14
- Orders for durable goods (machinery, computer equipment and other big-ticket items) grew 11.2% in July, following June’s upwardly revised 7.7% increase. Significantly, “core” capital goods, a key measure of business investment, edged up 2%, nearly returning to pre-pandemic levels.15
Meanwhile, July data for U.S. personal income (+0.4%) and spending (+1.9%) came in stronger than expected but still reflected a significant deceleration from levels in May and June, when they benefited from initial economic reopenings.16 The net effect of last month’s upticks in income and spending was a drop in the average savings rate to a still-very-high 17.8%.16 The true test of consumer durability will come in the August data. That will cover a period in which the safety net for unemployed workers was greatly reduced due to the expiration of the enhanced jobless benefits provided by the CARES Act. Incomes are sure to suffer, and spending may follow.
One glaring omission from the string of goods news has been the U.S. labor market. First-time claims for unemployment insurance continued to tally over 1 million per week even as the overall number of people on unemployment is still edging down. Markets expect this Friday’s release of the August employment report to show a decline in the unemployment rate to below 10% and another month of 1.5 million+ net new jobs created. As impressive as that sounds, such a gain would still leave the U.S. labor force close to 10 million jobs short of where it stood in February. And keep in mind that Congress remains in recess as we approach the one-month anniversary of the expiration of enhanced unemployment benefits.
It’s these 10 million unemployed workers — and the policy-driven cuts to their incomes — that continue to restrain us from predicting a rapid, V-shaped recovery for the U.S. economy as a whole. While large sectors (housing, technology and manufacturing) have shown impressive resilience to the economic impact of the pandemic, and businesses and consumers seem to have weathered this summer’s wave of new COVID-19 cases in the South and West, entire industries tied to leisure and travel are still depressed. They may remain so until the health care crisis has fully abated due to a widely adopted vaccine or some other remedy. Overall, we do not see a full return to the prior peak in U.S. economic output until the second half of 2021. As long as trade and travel remain depressed, a similar fate looks likely for the rest of the world.