What Does the Market's "New Normal" Look Like?
May 26, 2020
By Ted Hanson
Securities Analyst
For many cities, states, and countries, COVID-19 cases have been on a downward trend in recent weeks. These places are beginning to reopen their doors and take their first steps back to “normal.” While we are all eager to put the past few months behind us, our new standard of “normal” has changed — both in life, and in the markets.
The “New Normal” for Stocks
Volatility in the stock market will likely remain high. Over 25 percent of the trading days this year ended with greater than a 3-percent swing — far more than any given year in the past 20 years. There will continue to be headlines in the coming weeks and months that create volatility. The markets will react to updates on the economy and progress toward a vaccine. Over the past month, stocks experienced a sharp rebound. It is still too early to tell if the rally will continue. Nonetheless, there currently appears to be some optimism within the stock market.
The “New Normal” for Bonds:
While stocks are bouncing back from the lows in March, bond yields remain near historically low levels. The yield on a 10-year Treasury note has stabilized slightly above the all-time low we experienced in March. This may be a sign that bond investors are anticipating a long and slow economic recovery. Chairman Jerome Powell made it clear the Federal Reserve is willing to keep rates low as the economy recovers. Bond investors expect a repeat of the actions used after the financial crisis in 2008, anticipating several years of low rates before a gradual increase. Low yields typically encourage investors to look at riskier assets in search of returns; however, demand for high-quality debt remains strong.
As you can see, stock and bond market have different outlooks for the future. Stocks are looking past the economic recession toward a recovery. The bond market is predicting a slow and long recovery.
How we see the outcome:
At its core, investment management involves a decision process that develops and acts upon a point of view – and at the same time, balances expectations with a recognition of the risk of being wrong.
Our expectations are optimistic. We believe the U.S. economy will recover from its lockdown, sooner rather than later and perhaps stronger than many now expect. This suggests investment in risk assets will be rewarded over the long term, as has occurred throughout our history. And, the Federal Reserve will act to insure progress takes a firm hold before accommodate policies are lifted.
These are favorable conditions for investing. While volatility and uncertainty rule today, it is not a time to move to the sidelines. We will stay fully invested and broadly diversified. Our focus remains on the long term goals of our clients. As always, we are here, ready to discuss your portfolio, its opportunities and risks, and your goals.