The recent stock-market recovery seems disconnected from the current scope of the pandemic and the recent and prospective economic fundamentals. Global equity markets have returned 31.1% since the recent bottom,1 even as unemployment numbers have exploded, retail sales have plummeted, and worries about future inflation have intensified.
Whether the market is fairly valued at this stage depends on your view of the future state — but there is little agreement on expectations. For example, according to Consensus Economics, Inc., a survey of 250 prominent financial and economic forecasters, US GDP forecasts for 2020 are wildly disparate, ranging from a high of -2.6% to a low of -8.2%, with projections for recovery in 2021 ranging from 0.7% to 8.6%. Forecasts for US pre-tax corporate profits are also all over the map, from a high of -6.0% to a low of -32.3% for 2020, with similarly wide ranges for the expected recovery in 2021 2.
With so much uncertainty regarding fundamentals, the decision to invest now rests on assumptions about the health outlook and the impact of the fiscal and monetary response. Our view is that, while the health shock is not over, the public-health policy response to another wave of infections is likely to be less aggressive, and therefore less damaging to the overall economy. We also believe that fiscal and monetary support staved off a liquidity crisis that could have devolved into a solvency crisis. We recognize that there will be weak spots and some financial impairment as a result of lockdowns, but the damage will be much less due to the massive policy support.
So, while the outlook remains uncertain, we believe that the more extreme negative outcomes are less likely and that, while the market may still experience pullbacks and choppiness, we are unlikely to test the lows. We continue to recommend near-strategic target equity weights for investors with a medium- to longer-term horizon.