The past several months have been consumed by COVID-19. The global pandemic has literally and figuratively infected every aspect of our daily life. It has left a permanent imprint on the way we think about our health, finances, politics and social interactions. COVID-19 has not only changed the way we live, work and play, but it has exposed fragile cracks in today’s global economy while simultaneously unveiling some durable strengths that lie beyond the pandemic’s reach.
In time, human resiliency, ingenuity and focus will conquer the COVID-19 pandemic. However, it has already altered the course of history. Regrettably, there is no return to normal. Similar to past crises and pandemics, we’ll experience a tricky transition to a new environment. As the first half of 2020 concludes and the second half begins, the great reset is firmly underway. For investors, this rebirth presents both big risks and considerable opportunities.
The pandemic’s powerful impacts stretch well beyond the health challenges. Despite mounting job losses, plummeting corporate profits and disastrous economic data, miraculously, markets have rallied sharply since hitting their lows on March 23. Massive fiscal and monetary policy responses have aided the unexpected rebound in risk assets. Typically reliable inputs into the investment decision-making process have been rendered useless by COVID-19, leaving many investors baffled. The highly anticipated US election has become an afterthought in the wake of the pandemic.
In the short term, market sentiment has been bolstered by the reopening of the global economy, optimism regarding potential health solutions to COVID-19 and a firm commitment from policymakers to do whatever it takes. But, make no mistake about it, this temporary reprieve from fundamentals driving asset prices will likely end soon.
As 2020 grinds on, investors will be forced to reconcile the rally in risk assets with the deterioration in fundamentals. Without an economic recovery (regardless of which letter of the alphabet it most resembles), a breakthrough on corporate profits and a reversal of job losses, it will be difficult for risk assets to continue their momentum. And as November’s US election draws closer, political headlines will again take center stage, likely generating further market-moving volatility.
Adding to this challenging environment, interest rates at extreme lows make it nearly impossible for investors to generate much-needed income by using traditionally low-risk investments. Adopting a total return mindset while thoughtfully investing alongside a deep-pocketed buyer like the Federal Reserve that doesn’t care about prices or crumbling fundamentals may provide fixed income investors some comfort.
Investors with courage, capital and conviction should look beyond the turmoil created by the COVID-19 outbreak during the first half of 2020. Life as we know it has changed forever. However, this new environment also presents opportunities for innovative businesses to adapt and potentially thrive in the post-pandemic environment. Looking beyond the borders of the United States and further down the market capitalization spectrum may also reveal some interesting relative value opportunities.
As economies reopen and we look ahead to better days, investors should consider the following three themes when building portfolios in the post-pandemic environment:
For more detail, read our full 2020 Midyear ETF Market Outlook.
The views expressed are the views of Michael Arone as of May 26, 2020, and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.