- US in the pandemic crisis: The US economy has entered a recession, induced by the social distancing and quarantining measures introduced to tackle the pandemic crisis. To monitor how deep the recession will be, we use both traditional macroeconomic data (eg, weekly retail sales, jobless claims) and big data (e.g., dining out, travel and box office sales, travel numbers and google searches for ‘recession’ and unemployment statistics). Both sets of variables suggest an unprecedented collapse in domestic demand.
- US fixed income: Regarding the Treasury market, as long as the COVID-19 pandemic continues but with signs that the curve is flattening in Europe and getting closer to doing that in the United States, US Treasury yields may have bottomed. In the long term, the fundamentals for Treasuries look challenged, with rising budget deficits and surging Treasury issuance. As to credit markets, following the sharp March sell-off, we are looking for some stabilisation. There is some evidence of liquidity returning to US fixed income markets. The liquidity premium is being wrung out of the market and the credit premium is resuming its prominence in valuation. The new Fed facility to buy corporate bonds will support stability and liquidity in the credit markets. However, this has not been fully discounted along the term structure by the market. Driven by the Fed corporate buying programme, short-maturity corporate bonds are scarcely offered, though there is high demand. HY markets are beginning to recover, though the depth and breadth of trading both remain spotty. Limited but newly re-energised new issuance ‘rescue’ has resumed successfully. We might be at attractive entry points, as, on average, there is a history of attractive positive HY returns vs government bonds two years after spreads ascend through 800 bps. Regarding securitised credit, we remain constructive on the residential housing market and maintain a high-quality bias in Commercial mortgage-backed securities, where there is risk of modifications and forbearance. Given continued economic uncertainty and the market focus of recently enacted policy measures, we favour high-quality assets within each fixed income sector.
- US equity outlook: After having peaked at an all-time high on 19 February, US equities had plunged by more than 33% by 23 March. Since then they have recovered somewhat. In our view, a rebound was warranted after such a quick sell-off. Going forward, market trends remain clouded by high uncertainty over the extent of the virus’ economic fallout; this will reflect in the performance of corporate earnings. We keep a cautious stance and wait for evidence related to the potential performance of US earnings, together with corporate guidance for the quarters ahead. On a long-term perspective, US stocks have outperformed most markets for structural reasons (e.g., stronger economy, high share of growth stocks). When an external shock hits, the companies that exit the crisis in better shape tend to be those that can seize the opportunities likely to emerge in the next phase. At the sector level, investors should avoid those that have been most hard hit, as the segments that fall significantly during a bear market never end up driving the following bull market. Given current circumstances, it is very difficult to call a market bottom. However, huge market dislocations may offer opportunities to long-term investors to enter the market gradually.