U.S. Stocks are Looking More and More Attractive at These Levels For Longer Term Investors
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 3/13/2020. Rates and Economic Calendar Data from Bloomberg as of 3/13/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets continued to tumble lower last week, as new “social distancing” policies were implemented in response to the rapidly spreading coronavirus (COVID – 19). In the U.S., the S&P 500 Index fell to a level of 2,711, representing a loss of 8.73%, while the Russell Midcap Index retreated 12.87% last week. In addition, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -16.44% over the week. Those looking for shelter from negative returns were unable to find it in international equities, as developed and emerging markets moved 18.36% and 11.92% lower respectively. Finally, the 10-year U.S. Treasury yield stabilized at 0.94% after falling as low as 0.34%, following the Federal Reserve’s decision to resume its asset purchase program.
On Sunday afternoon Federal Reserve Chairman Jerome Powell announced that the Fed cut the Federal Funds Target Rate to a range of 0.00% – 0.25% and will also begin a massive quantitative easing (QE) program that will involve the purchase of $700 billion worth of U.S. Treasury and mortgage-backed securities. While these actions should provide additional sources of liquidity and stimulus to help limit the overall economic fallout of the coronavirus, stock markets did not react well. With central bankers and legislators working to formulate sufficient monetary and fiscal stimulus packages in hopes of staving off an anticipated contraction in economic growth, we continue to view U.S. equity valuations at these levels as favorable for long to intermediate-term investors. That view is underpinned by our belief that this is an event-driven health crisis, not a financial crisis that could potentially lead to a systemic collapse of the global financial system and a sustained psychological impact on the consumer.
The Great Financial Crisis (GFC) of 2008 brought nearly all lending to a halt, which left businesses unable to finance operations, and unable to retain employees during unprofitable economic times. This confluence of circumstances left the world shell shocked, an impact that had a lasting effect and would continue to deter business activity long after the initial blow of the GFC had been dealt. That does not appear to be what we’re dealing with right now. As we entered 2020, the economy was growing at a healthy pace, and unemployment and inflation hovered around all-time lows. These stabilizing factors should offer enough ballast for the U.S. economy to weather two potential quarters of negative growth and ultimately recover to some degree in the fourth quarter based on current consensus forecasts.
For perspective, consider the chart below highlighting the performance of the S&P 500 Index in the six months following an event-driven bear market.
These historical results are encouraging. Of course, past performance does not guarantee future results, but in this case, it does assist in making a compelling argument for why U.S. equities might be able to finish the year above current levels. With that said, we understand that these are unprecedented and uncertain times. As a result, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.