We are now halfway through 2020, which is shaping up to be a very unpredictable and challenging year. The U.S. has entered a recession as economic activity has severely contracted. Unemployment rose from almost full employment to nearly 15%, which is high but much better than many were predicting. Gross domestic product (GDP) growth could contract by over 30% in the second quarter.
While the economic data declined significantly, investors bid up stock prices close to where they started the year. While there seems to be a disconnect between the economy and the stock market, there is a reasonable explanation. Stock markets are forward-looking. The economic data being released is recording what already happened and a decline was largely anticipated. Some economic readings are coming in better than expected, and worst-case scenarios have not been realized. Global central banks, including the U.S. Federal Reserve, lowered interest rates to nearly zero, and governments around the world committed trillions of dollars to fiscal stimulus. In comparison, the current stimulus significantly exceeds the packages during the 2007-2008 financial crisis and was deployed a lot quicker. Many investors saw a positive effect on markets in 2009 and stayed in the market to avoid being left out this time.
Are investors too optimistic though? One of the most popular metrics investors look at to measure stock prices is the price-to-earnings—or P/E—ratios. In aggregate, equities are over-valued: the prices of stocks compared to their expected earnings are at levels not seen since the dot-com days in the early 2000’s. Future earnings could always surprise equity analysts, and this would cause P/E ratios to fall, but these relatively high valuations remain a concern, and we continue to expect more volatility as earnings and prices adjust to expectations.
Bond investors may be a little less convinced of the possibility of a quick V-shaped recovery. Demand for high-quality government bonds is still high as investors bid up the price of these bonds, pushing down the yields to historically low levels. The benchmark 10-year Treasury yield fell below 0.5% in March and has only climbed modestly since then. Bond investors are not alone in this market, however, as they have competition from the Federal Reserve, which is also buying bonds to keep yields low to stimulate the economy. The 10-year Treasury correlates well with mortgage rates and keeping mortgage rates low enables people to refinance, putting more money in their pockets to spend. Also, it enables people to buy new homes at low rates, and corporations can continue to roll their debt without significant increases in interest expense. At-A-Glance Economic data is recovering off of very low readings after many states and counties started to ease social distancing policies. Stock markets are forward-looking and are pricing in a V-shaped, or quick, recovery after massive fiscal stimulus packages were approved. We think the economic recovery will be more U-shaped and therefore slower, with the economy taking longer to rebound as consumers and officials fear a second wave of the virus. With high expectations and valuations embedded in markets, we continue to expect volatility to remain elevated. While there are risks in equity markets, bond markets also pose risks at low rates. A balanced investment approach focusing on long-term objectives is prudent. So, weak economic data is coming in better than expected and there are trillions of dollars in stimulus on the way with extremely low interest rates on the horizon for the foreseeable future. Investors have largely priced in the good news, so if earnings or economic data miss to the downside, we could see some volatility. Having a strong financial strategy in place can give you confidence through the bouts of elevated volatility we are anticipating. Understanding your specific goals and objectives becomes even more important now. Your financial professional can help keep you on track and keep your sights on your long-term plans.
This report is created by Cetera Investment Management LLC
About Cetera® Investment Management Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.
About Cetera Financial Group® Cetera Financial Group (“Cetera”) is a leading network of independent firms empowering the delivery of professional financial advice to individuals, families and company retirement plans across the country through trusted financial advisors and financial institutions. Cetera is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions.
Through its multiple distinct firms, Cetera offers independent and institutions-based advisors the benefits of a large, established broker-dealer and registered investment adviser, while serving advisors and institutions in a way that is customized to their needs and aspirations. Advisor support resources offered through Cetera include award-winning wealth management and advisory platforms, comprehensive broker-dealer and registered investment adviser services, practice management support and innovative technology. For more information, visit cetera.com.
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA/SIPC.
Disclosures The material contained in this document was authored by and is the property of Cetera Investment Management LLC. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by affiliated and non-affiliated registered investment advisers. Your registered representative or investment adviser representative is not registered with Cetera Investment Management and did not take part in the creation of this material. He or she may not be able to offer Cetera Investment Management portfolio management services. Nothing in this presentation should be construed as offering or disseminating specific investment, tax, or legal advice to any individual without the benefit of direct and specific consultation with an investment adviser representative authorized to offer Cetera Investment Management services. Information contained herein shall not constitute an offer or a solicitation of any services. Past performance is not a guarantee of future results. For more information about Cetera Investment Management, please reference the Cetera Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the registered investment adviser your adviser is registered with. Please consult with your adviser for his or her specific firm registrations and programs available. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision.
All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.
A diversified portfolio does not assure a profit or protect against loss in a declining market.