Managing through a down market
The Multi-Asset Solutions team’s full Q2 Outlook update can be accessed here.
In our 2020 outlook, we expressed concerns of economic and market vulnerability. Companies, having experienced decelerating profits since 2015, did not have an adequate buffer against risk. Valuations were elevated, forward-looking economic data had grown a bit wobbly, and trade frictions had tested global supply chains. The threat to investment portfolios was that the bull market’s end could come swiftly and without warning.
COVID-19’s spread, or more specifically, efforts to contain the spread, have magnified these late cycle dynamics. On its own, the financial ramifications of the virus to the U.S. would be serious. Exacerbated by these pre-existing economic weaknesses, it risks creating a chain reaction. Our chief concern is that even short term impacts of the virus will cripple corporate activity, putting some companies out of business, restricting credit availability, and further damaging earnings, hiring, sentiment, and spending.
Substantial market volatility will persist in the coming months. Government responses will take time to become effective, and social distancing efforts will continue. Lower price growth, prompted by falling demand and intensified by the recent oil price war, adds to market shifts. To manage through the crisis, we are structurally underweight risk assets, and we are taking a tactical approach to sentiment-driven market moves:
- We are maintaining our equity underweight. We would need to see a peak in COVID-19 case numbers and spread, as well as a coordinated and effective policy response, before anticipating a durable improvement in market sentiment.
- We are expressing a bias to large-cap equity in our portfolios, as their larger cash reserves will be better suited to handle funding storms in the near term.
- Quality over style: As the economic impacts of the crisis deepen, the characteristics of what constitutes a “cash distributing” company could evolve. Working with good active managers who can source these opportunities may be more important than the style choice.
- There will be an entry point for international equity later, but effects from a potential U.S. downturn makes the timing of that opportunity unclear.
- Big market moves provide a prudent opportunity to rebalance duration. On a tactical basis the volatility in rates provides good opportunities to generate profits in fixed income. For strategic investors, with the U.S. 10-year yield at historic lows, additional significant gains in the long term are unavailable.
- Developments in credit markets could amplify the economic disruption from the coronavirus. We have lowered our credit exposure on a tactical basis. Strategic investors should focus on default avoidance.
Managing through a down marketTo learn more about our asset class, style, and geographic preferences, find our Q2 Outlook Update here
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
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