Market Outlook

2020 Midyear Market Outlook: The Road to Recovery

June 19 2020

Although the coronavirus pandemic delivered a staggering blow to the global economy, equity and credit markets rallied dramatically in the second quarter through mid‑June. The central issue now is whether those rallies have gotten ahead of themselves, Sharps says.

“Anytime you’re in an economic downturn, there comes a point where markets begin to anticipate improvement,” Sharps notes. “Given that the spread of the virus appears to have slowed and many businesses are reopening, I’m not too surprised that markets are off their lows.”

Recent signs that U.S. employment is bouncing back more rapidly than expected as the economy gradually recovers are a significant “green shoot” that has pushed yields on 10‑ and 30‑year Treasury bonds modestly higher, Vaselkiv notes. 

Opening Quote …I do think the second quarter will prove to have been the most challenging for economic activity and earnings. Closing Quote
— Robert W. Sharps, Group CIO and Head of Investments

That said, the near‑term earnings outlook remains grim. While consensus forecasts at the start of the year anticipated global economic growth of around 3%, current estimates see a 3% decline for the year, Thomson says. Taking operating leverage into account, that could produce a 50% to 60% aggregate decline in corporate profits.

“We’re still very early in the recovery,” Sharps warns, “but I do think the second quarter will prove to have been the most challenging for economic activity and earnings.”

The key question, Sharps says, is how long it will take for companies to regain enough earnings power to justify current valuation levels while compensating investors for the risk that an economic recovery might not progress as rapidly or evenly as expected.

Global Economic Stimulus to Fight COVID‑19 Impact

(Fig. 1) Percent of Gross Domestic Product

Percent of Gross Domestic Product

January 31 through May 31, 2020
Sources: Cornerstone Macro, used with permission. Additional T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

Stimulus Can Only Do So Much

To a large extent, the rally in risk assets has been driven by massive doses of fiscal and monetary stimulus, which have been even larger than during the 2008–2009 global financial crisis. This, Thomson says, has set the stage for a tug of war between ample liquidity and the collapse in earnings. Further market volatility could result, he cautions.

While fiscal and monetary stimulus have bolstered global markets, there are limits to what governments can do to sustain the recovery:

  • In the U.S., a significant portion of the stimulus funds sent directly to low‑ and moderate‑income Americans in April appear to have gone into savings, Vaselkiv says. This could hinder a recovery in consumer spending, which typically accounts for roughly 70% of U.S. gross domestic product (GDP).
  • Although French President Emmanuel Macron and German Chancellor Angela Merkel have proposed a European recovery fund to finance EU‑wide fiscal stimulus, unanimous agreement among the EU’s member nations will be required to implement it, Thomson notes.
  • Many emerging market countries don’t have the economic and financial strength to undertake massive fiscal stimulus, Thomson adds.

With much of the anticipated benefits of stimulus already priced into risk assets, economic fundamentals will have to take over for broad markets to move higher, Sharps says. “I think the going will be tougher from here.”

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This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

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Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.

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