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Equity Outlook

Source: Bloomberg, Morningstar Direct; CBOE VIX, S&P 500 total returns as of 3/30/2020. The S&P 500 is an unmanaged index and cannot be invested in directly.

Past performance is not a guarantee of future returns.

The record 11-year bull market in stocks ended abruptly in March after the World Health Organization declared the coronavirus a global pandemic and countries introduced unprecedented measures to fight the spread of the disease. Because the market selloff was triggered by a health crisis, the range of outcomes is wide, and uncertainty is high. We believe volatility will likely stay elevated for some time, but positively, the market is already discounting a severe hit to economic activity and earnings.

Markets are pricing in a recession – On March 23, the S&P 500 declined 34% from its February high, matching the average bear market decline since 1940. The silver lining is that a recession is being priced in to stocks already, suggesting the bulk of the selloff may have already occurred.

Corporate earnings will take a hit – The sudden stop in economic activity is unprecedented and will drag profits lower in the next few quarters, particularly in the consumer and services sectors. Given the elevated economic uncertainty, there is little clarity on the magnitude and duration of the impact to corporate earnings. We should see 2020 earnings estimates come down dramatically in the next few months, but as we progress through the summer, we believe investors’ attention will shift to next year’s outlook.

Fear creates opportunities – The VIX, a measure of market volatility often called the “fear index,” reached a record high this quarter, surpassing levels seen during the Great Recession, as shown above. While distressing for investors, extreme volatility has not historically lasted long and has been followed by strong forward returns. * Periods of indiscriminate selling and forced liquidation create long-term opportunities to buy quality companies at a discount.

Action for investors

Consider systematic investing and rebalancing instead of trying to time the bottom. The sharp pullback in stock prices presents an opportunity for investors to use excess cash targeted for future investments and potentially benefit from this decline over the longer term.

Important Information:

* Past performance of the market is not a guarantee of what will happen in the future.

Systematic investing does not guarantee a profit or protect against. Investors should consider their willingness to keep investing when share prices are declining.

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