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Investing in Uncertainty
- The recent stock-market recovery seems disconnected from the current scope of the pandemic and economic fundamentals.
- Amid unprecedented uncertainty regarding future fundamentals, investment decision making now rests on assumptions about the health outlook and the effectiveness of the fiscal and monetary response.
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.
For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third-largest asset manager with US $2.69 trillion* under our care.
* AUM reflects approximately $50.01 billion USD (as of March 31, 2020), with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as marketing agent; SSGA FD and State Street Global Advisors are affiliated.
1 Based on MSCI World Index returns (USD, net of dividends). Source: FactSet, from March 23 through May 20.
2 Source: Consensus Forecasts survey report, May 11, 2020.
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The views expressed in this material are the views of Lori Heinel through 21 May 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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