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Global Portfolio Strategy | March 10, 2020

The COVID-19 outbreak (coronavirus) roiled markets over the past two weeks, putting the S&P 500 into correction territory and near a 20% bear market decline. Though new cases in China slowed during the month, data out of China pointed to economic contraction and economic forecasts in the United States began to fall as new cases emerged in the United States and globally as containment efforts intensified.

Investment Takeaways

  • The ongoing market correction may present an attractive medium-to-long term opportunity and our year-end 2020 fair value S&P 500 Index target of 3,250-3,000 may still be attainable*. However, given the uncertainty, our economic, earnings, and market forecasts are currently under review.
  • We favor large cap stocks over small and a balance of growth and value equity styles where suitable.
  • Attractive valuations and solid economic growth may favor emerging markets over foreign developed markets. Slowing new cases in China has helped buoy emerging market stocks in recent weeks.
  • The emergency 50 basis point (.5%) rate cut by the Federal Reserve (Fed) March 3 in response to the risks to U.S. growth from the outbreak did little to stop cascading yields at all-time record lows.
  • We favor a blend of high-quality intermediate bonds with a modest underweight to U.S. Treasuries and still see value in mortgage-backed securities (MBS) relative to Treasuries, but we have downgraded our view to neutral due to the potential impact of refinancing as mortgage rates fall.
  • U.S. stocks corrected sharply in recent weeks, leaving markets oversold on various metrics. Bottoming can be a slow process, but sentiment reveals signs of extreme fear often associated with market lows.
  • Key changes from February’s report: Upgraded healthcare view from neutral to positive; downgraded industrial metals view to neutral from positive; downgraded MBS from positive to neutral.

Our Asset Class & Sector Choices

Economy: Pre-Outbreak Momentum Evident in U.S. Data

February data reflected some evidence of COVID-19 impact but generally held up well in the United States. That picture will likely change, however, when March data is reported. Globally, it was a different story, with first quarter data pointing to economic contraction in China, the epicenter of the outbreak.

  • Conference Board’s Leading Economic Index (LEI) rose 0.9% year over year in January. The strong bounce in the LEI after a string of lethargic readings signaled continued economic growth.
  • Payrolls and Labor. Nonfarm payrolls increased 273,000 in February, well above expectations for a gain of 175,000. The gain, which is sufficient to maintain the current low unemployment rate, was above the 12-month average of 201,000. Wages rose 3% year over year in January, in line with recent trends.
  • Inflation. The core Consumer Price Index (CPI), which excludes food and energy prices, increased 2.3% year over year, in line with the recent trend and not high enough to worry the Fed.

    On the wholesale side, the core Producer Price Index (PPI), excluding food and energy increased 1.5% year over year in January.

    Prices for core personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, increased a softer-than-expected 1.6% year over year in January, well within the Fed’s 2% target.
  • U.S. manufacturing slowed in February as the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) edged lower to a marginally expansionary 50.1. Supplier delivery times lengthened due to China’s measures to contain the COVID-19 outbreak.
  • U.S. Consumer. The Conference Board’s Consumer Confidence Index rose slightly in February and remained elevated despite increasing fears of a U.S. COVID-19 outbreak. Recent sales data reflected a 0.3% increase in January, in line with expectations. The retail sales component within gross domestic product (GDP) was unchanged after a 0.5% increase in December.
  • U.S. Business Investment. Bookings for all durable goods dipped 0.2% month over month in January and fell 2.3% year over year. However, excluding volatile transportation orders, capital goods orders rose a solid 0.9% month over month and were flat year over year, reflecting continued sluggish capital investment from corporate America.
  • Federal Reserve. The Fed announced an emergency 50 basis point (0.5%) rate cut March 3, the first intra-meeting cut since 2008, amid concerns about a widening COVID-19 outbreak. Even after the announcement, which failed to buoy market sentiment, the bond market was pricing in additional rate cuts at the Fed’s March 17–18 policy meeting.

2020 Real GDP Growth Forecasts

Click here to download a PDF of this report.



This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.

Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid‐cap stocks are generally more volatile than large cap stocks.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax‐free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

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