We don’t really know how long this crisis is going to last. No one knows for sure. But I’d say in general we think we’re likely to see a short and sharp recession. If we’re willing to look out toward the end of 2020 and into 2021, given the amount of policy accommodation we’ve seen, there’s a good chance that we could see a pretty quick recovery and a return to normalcy.
Looking into what we think the market looks like on the other side of this crisis, we think that we’re very likely to be in a zero interest rate environment for a very long time. And that has a couple of important investment implications. Implication number one is that the search for yield is likely to continue and be even stronger than it was before. That was something that was already in place even before this crisis, but in a zero-interest-rate environment, investors are going to be even more keen to try and find yield-bearing and income-generating securities. So certainly, think of things like utilities that are known for having dependable yields. Think of asset classes like convertible bonds that trade like equities and therefore have seen a pretty significant sell-off along with the equity markets but that now maybe are having some pretty attractive yields. If we can be confident that they’re going to be able to pay those yields, then they can make for some very good investments. Those are really the types of things that we’re looking for on the yield side.
The second important implication would be that potentially we get even higher multiples on secular growth companies in the future. Once again, this was a trend that was already in place even before this crisis. The reality is that the lower-interest environment that you’re in, the greater the multiple that investors are willing to assign to future growth. Think about your big tech companies. Think about your cloud software companies. Many of these already had what seemed to be high valuations. But in a lower and lower-interest rate environment, there’s actually no reason why those valuations couldn’t go even higher. So there might be potential opportunities there given there’s been an across-the-board pullback in asset prices.
I’d say the three indicators that I’m following the most are the U.S. dollar, inflation break-evens and gold. What we want to see is the U.S. dollar declining. We want to break-evens rising. And we want to see gold flat to maybe slightly rising. All of that will tell you that the Fed is doing its job appropriately and is providing adequate liquidity for markets to be able to recover. If we were to see the opposite, if we were to see a spike in the dollar, gold collapsing, that would tell you that the Fed is losing.
So as of right now, you look at the gold price, it’s actually not far from where it was before the crisis, so it’s kind of telling the Fed is doing just enough and it’s doing an adequate job. As long as that continues, I think there’s a good chance that we’ve seen some of the worst of the crisis and that hopefully we’re on the path to healing.