07.31.20

Midyear Outlook: The road to economic recovery

On July 22, 2020, TIAA presented a live webinar about the road to economic recovery as global economies continue to grapple with the COVID-19 pandemic and the uncertainty that accompanies it. The event, hosted by TIAA Wealth Management Director Jim Daniello, CFP®, featured Brian Nick, CAIA®, chief investment strategist at Nuveen, who provided economic insights and tips for remaining on track toward your goals amidst economic uncertainty.
 
Below are key highlights from the webinar. To access the full, recorded webinar, click here.

Where we’ve been

In January 2020, the markets were riding high on a 10-year bull market and the longest economic expansion in modern history.
 
“What we didn’t know was that both of these would soon come to an end as the world was hit by the coronavirus and the related economic recession,” said Nick.
Highlights:
  • Relatively safe asset classes like treasuries and certain corporate bonds have delivered positive returns over the first half of the year, while the most volatile parts of the global stock market have been challenged.
  • Congress and the Federal Reserve took swift action to support growth.
  • Headlines in recent weeks suggest COVID-19 cases are on the rise in a majority of states, while the virus seems to have been largely contained in other parts of the developed world like Europe and Japan.

Where we’re headed

“The recession is already over and probably has been since May, when the economic data shows a new expansion began,” Nick said.
 
As indicated by the red line on the graph, Nick anticipates more of a “swoosh”- shaped recovery marked by a much deeper but shorter recession compared to previous downturns.
Highlights:
  • The pace of the recovery remains uncertain. A W-shaped recovery remains a risk if we see another set of economic shutdowns.
  • Consumers were better positioned this time around, enabling them to weather the economic downturn.
  • Savings rates were much higher coming into this crisis, and the average U.S. household has been able to preserve significantly more wealth than in 2007.
  • Government stimulus checks and the ongoing emergency supplement to unemployment insurance caused incomes to rise compared to their February levels.

Labor has been slow to recover

We continue to see well over one million people file for unemployment insurance on a weekly basis, and close to 20 million remain on that insurance to this day despite the impressive job gains in May and June.
Highlights:
  • June jobs numbers were actually better than expected; however, things are still grim.
  • The 11.1% unemployment rate is higher than at any time during the Great Recession, effectively putting a parking brake on the U.S. economic recovery.
  • To bring people back quickly into the labor force, the economy needs to run hot with help from the government and the central bank.

Stimulus measures have made an impact

Nick pointed out that countries around the world have joined the United States in trying to contain or repair economic damage.
 
Highlights:
  • Europe and Japan are spending as much, or more, as a percentage of their gross domestic product (GDP) on stimulus programs in 2020, and will likely have to continue spending in 2021.
  • Stimulus measures have had a positive effect but won’t get the economy moving on their own. Only a full defeat of the virus can accomplish that.
  • Several provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are up for renewal in July. If certain programs are allowed to lapse, this may cause the economy to stand still or take a few steps back.
  • Additional stimulus measures will be needed very soon, and likely well into next year.
  • A marked rise in inflation would be a sign that the recovery had been achieved in a robust way, but the United States is not anywhere near that point right now, with unemployment still in the double digits and virus cases rising throughout the country.

Central banks remain at the center of the recovery

Central banks continue to play a key role in the recovery, both here in the United States and abroad, in the markets’ collective ability to heal.
 
“You name it, and they’ve done it,” Nick said. “Cutting rates to zero, pledging to keep them there indefinitely, and expanding the size of their balance sheet.”
Highlights:
  • The Fed acted quickly to ease financial conditions, which helped to ensure the financial markets are functioning and the economy and markets remain liquid.
  • They’ve introduced new features that weren’t present after the financial crisis of 2008, such as lending money to issuers of municipal bonds and buying corporate bonds in the open market, both of which have contributed to the bond market’s recovery.
  • The speed with which they’ve done so has been striking compared to the period in 2008-09, when financial conditions were badly impaired for a long period of time and held the recovery back.
  • Prior to March, when the virus forced closings, we had a strong and robust economy, putting us in a stronger position to make our way out.

How the stock market is responding

While we’ve seen a V-shaped recovery from the equities market thus far, globally, stocks that have done well have varied significantly by geography and sector. The United States has led the way, primarily through technology companies, which tend to be more shielded from the effects of the coronavirus and generally have high secular earnings growth. This puts them in greater demand during periods in which growth is expected to be low.
Highlights:
  • Stocks aren’t alone in staging a strong recovery. Most asset classes that sold off sharply in March are close to or back to where they were in terms of attractiveness.
  • That presents a problem for investors, particularly those who may not have fully participated in the rally over the past few months.
  • In December 2019, Nick cautioned investors to brace for a more difficult decade in the 2020s because prices had run up considerably and the economic road wouldn’t be as smooth.
  • Nick noted how little has changed relative to the valuation story due to the whiplash seen in asset prices.
“That’s why it’s so important to have a plan and a strategy in place that can help avoid emotional decision making and help keep you on track as the markets fluctuate over time,” Daniello said. “When you combine that with professional money management, which includes dynamic portfolio rebalancing over time, you essentially create an anchor to help you weather storms along the path to accomplishing your goals.”

Fixed income remains fixed at low levels

According to Nick, the Fed has made it clear that interest rates will remain low for
some time to come.
Highlights:
  • Low bond market yields have made it challenging for those seeking income from their fixed income portfolios to do so without taking on additional risk.
  • Investors, especially those in or nearing retirement, may want to think about creating a buffer to help manage different risk factors—whether that’s volatility in the equities market or low bond market yields.
  • Daniello notes that your wealth advisor can help you create an “income floor”—a combination of different lifetime income  sources, such as Social Security benefits, a pension if you have one and other guaranteed income sources, like fixed annuities—to cover your essential expenses in retirement.

Back to the future

As businesses and economies around the world struggle to remain open, for many, business as usual may be a thing of the past.
 
Highlights:
  • The decades-long trend toward packing workers into less and less space is probably about to reverse given the heightened concern about worker safety.
  • Working from home and other semi-permanent changes following the pandemic could cut business costs and make companies more efficient.
  • Business travel will likely remain significantly below its 2019 level, even if people feel fully safe from the virus, because it’s expensive and relatively easy to eliminate.
  • As society adapts, there will be investment opportunities on both the buy and sell side to add value to portfolios.

The election is still up in the air

In addition to watching how the markets, economy and consumers are adapting to change, Nick and his team are keeping a close eye on the upcoming election.
 
Highlights:
  • It remains unclear whether or not the conventions will be held in person or online, or if voters will choose to vote in person or by mail, in election year 2020.
  • Nick noted a strong shift in the polls since May, indicating that former Vice President Biden currently has a moderately large lead over President Trump in the national popular vote.
  • However, the virus remains the primary driver of market returns at the moment. It may also be one of the primary drivers of the election, as well, although things can change quickly.
“As we’ve discovered this year, the world can look like an entirely different place in only a few months, so making large bets through your investments on one outcome or another is probably both difficult and ill-advised,” Nick said.

Expectations for the second half of the year

  • Base case: Nick believes that the most likely scenario is that the global economy recovers steadily, but not rapidly, over the balance of 2020, with possible headwinds arising from business closures and high unemployment rates. He expects to see U.S. corporate profits fall by 25% but recover strongly in 2021, and interest rates and inflation to remain low for the next several years.
  • The best-case scenario, according to Nick, would entail a rapid drop in the U.S. unemployment rate, resulting in a V-shaped recovery that includes distressed industries, such as airlines, hotels and tourism. In this scenario, the global economy would return to its prior peak in the first half of 2021, and rising inflation could become a “problem” for central banks, if not investors.
  • A downside scenario would be defined by failed fiscal policy efforts amid complacency about the U.S. economy and the coronavirus returning to its former lethality, resulting in a double-dip recession. Under this scenario, we could expect to see U.S. and Chinese relations deteriorate once again.
Since the future is unknown, it’s important for investors to work with their advisors to discuss ways to protect and optimize their portfolios. During periods of rapid change and uncertainty, anchoring yourself in a plan helps to ensure that the decisions you make are not driven by emotions and are aligned with your goals, timeline and risk tolerance. To learn more, contact your TIAA advisor to schedule time to talk about your financial planning needs.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any
particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

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