asset allocation | may 13, 2020
The Market Is Pricing in a Long Recovery
Investors may be wondering, "What is the market pricing in with respect to how we are going to recover as a society from this pandemic?" The consensus is pessimistic, with an expectation for a long recovery.
Head of Global Multi-Asset
We believe the market is pricing in a relatively slow recovery from the pandemic, with society’s return to normal approximately a year away.
Equity markets have rallied recently, driven by liquidity from global stimulus; however, earnings expectations for companies are dropping rapidly.
The flight to perceived safety continues as established growth stocks outperform instead of value and small-cap stocks—which typically rally in a recovery.
The question at the moment is, “What is the market pricing in with respect to how we’re going to recover as a society from this pandemic?” I would argue the market is pricing in a relatively slow recovery from the pandemic. Everyone is saying it will take time. So the consensus is probably fairly pessimistic at the moment. The consensus is probably that we’re not going to start to reopen the economy in the US before mid to end of May and it’s going to take at least a year before we get back to normal or the new normal. And I describe normal or the new normal as a point where we see baseball stadiums filled to capacity, for example.
If that takes a year, the question becomes, “How will companies do when they’re running below capacity?” So how will companies do operating at 20%, 30%, 50% capacity for a while. There’s stimulus money out there to help those companies. But in general, there’s a fairly long recovery ahead of us for the economy, for companies, for fundamentals. So if you’re an investor, that’ s not particularly insightful because that’s potentially what’s priced in the market. So how do you reconcile that with the fact that we’ve rallied in the S&P 500, 25, 26% from the bottom. That’s why you hear a lot of macro strategists, for example, say the market is pricing in a quick recovery on the virus, the market is expecting that we’ll turn a light switch and the economy will go back online quickly. I don’t think that’s the case. All of us investors, we’re reading the same research, and we know it’s going to take a long time.
The market has rallied from the bottom, probably primarily on the basis of liquidity and the stimulus. We’ve had $10 trillion and counting in stimulus globally—fiscal and monetary—in about four weeks, and that’s remarkable. And that’s a lot of money flooding the market. Also just stepping back from panic around the virus and the pandemic and around the plumbing in the financial system, which for a while looked like it was going to break. So that has fueled the market rally. We all know earnings expectations are dropping like a stone. And they’re continuing to drop like a stone. And most economists expect -4% in global GDP for 2020.
So it’s been a liquidity fueled rally. In fact, if the main scenario being priced in the market was one where we recover quickly from the virus, you probably would see different stocks outperform than what we’re seeing right now.
If the scenario was that we’re going to flip a light switch and that’s why the market has rallied, you’d probably see value stocks rally relative to growth. Meanwhile, they’re down about 17% year to date relative to growth. You’d also probably see small caps outperform large caps. And they’re down about 14% year to date relative to large caps. This rally has been described as a pseudo-bullish rally because we’re not seeing the cyclicals outperform. There’s still a flight to safety, if you will, in the stock market.
Now, bonds, and safety in bonds, is remarkably expensive so that’s contributing to this size and style rotation, if you will. In fact, it’s not a rotation because value was already underperforming growth going into the sell-off. It was already cheap going into the sell-off. And the same thing could be said of small caps.
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 April 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
Subscribe to T. Rowe Price Insights
Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.