The coronavirus pandemic, and the economic crisis it has spawned, have thrown into question all predictions about the stock market and other investable assets. Even so, 107 of America’s money managers took the plunge in the past few weeks and completed Barron’s latest Big Money Poll, sharing their forecasts for the markets, the economy, and even the political scene.
No surprise, most Big Money managers are anxious about the near term, given rising unemployment, falling economic output, gyrating share prices, and the ongoing toll of a novel and so far incurable disease. But they are largely upbeat about the outlook for 2021, when they expect America to get back to work and the economy to resume growing.
Only 39% of money managers say they’re bullish about the outlook for U.S. equities this year; 20% are bearish, and 41% describe themselves as neutral. But 83% are bullish on stocks’ prospects for 2021, while a mere 4% say they are bears.
I’ve been doing this for a long time and I’ve seen a lot of things,” says Kevin Bernzott, chairman and CEO of Bernzott Capital Advisors, citing the global financial crisis, 9/11, and runaway inflation in the early 1980s. “After every one of these events, things shake themselves out and, before long, we’re better off than we were before. I don’t think anyone has made any money in the long term by betting against the United States.”
Bernzott, whose firm manages about $900 million from offices in Texas, Massachusetts, and California, is among the Big Money investors counting on American ingenuity and perseverance, and consumers’ proclivity to spend.
“In the grand scheme of things, I’m bullish. It’s a vote of confidence in America,” says Kevin Grimes, president and chief investment officer of Grimes & Co. in Westborough, Mass. “I have confidence in our scientists and our business leaders. I also have confidence in the American consumer. While some habits and patterns may be different in a postpandemic world, we believe that a lot of the demand has been pushed out, instead of eliminated.”
Based on Friday’s closing price of 23,775, bullish poll respondents expect the Dow Jones Industrial Average (.DJI) to rise 3.7% by year end, to 24,658. By the middle of next year, the bulls see the Dow standing at 27,246, for a cumulative gain of nearly 15%. The bears, however, expect the index to decline almost 19% by Dec. 31, to 19,298, before recovering to only 20,267 by next June.
Barron’s conducts the Big Money Poll twice a year, in the spring and fall, with help from Beta Research in Syosset, N.Y. The latest survey closed in the second week of April.
Long-term optimism aside, the Big Money managers see a painful recession in store for 2020, with an extraordinary wave of layoffs and businesses in many industries threatened. Almost half of poll respondents expect U.S. real gross domestic product to decline by at least 10% in 2020. But there is disagreement over how long the recession will last: 37% of respondents expect a return to growth in the third quarter, while 46% say the economy won’t start expanding again until the fourth.
“Things are going to be pretty volatile in the near term,” says Mark Keeling, chief investment officer at BTR Capital Management, a San Francisco–based firm that oversees $800 million. “The economic data and corporate quarterly earnings reports are going to look pretty dire. But things will get better; these things do pass. A year from now, things will look different.”
Most Big Money managers foresee U.S. economic growth of 2% to 4% in 2021, while a quarter of them expect GDP to increase by 5% or more.
The most unknowable variable confounding investors—and others—is the eventual depth and duration of coronavirus outbreaks in the U.S. and around the world, which will determine how long people socially distance and nonessential businesses remain shut. Although growth in the daily infection rate in the U.S. shows signs of plateauing, new daily cases remain in the tens of thousands, with a death rate exceeding 5% of confirmed cases. And, the global hunt for a coronavirus vaccine or treatment for Covid-19—the disease it causes—may take a year or more. Thirty-five percent of poll respondents consider a spread of the pandemic the biggest risk facing the market; 24% cite a recession; and 14%, a depression.
U.S. stocks plummeted 34% from mid-February to late March, when the major indexes abruptly rallied and recovered 25%. Helping turn the tide was the introduction of massive fiscal and monetary stimulus in the U.S. and abroad.
But not all Big Money managers buy into expectations for an economic revival. Ulf Lindahl, CEO at A.G. Bisset Associates, calls the mass-tourism industry the “Achilles’ heel of the world economy,” responsible for 11% of global gross domestic product and employing 320 million people. He worries that the downturn in tourism could extend long after the rest of the economy returns to whatever normal might be.
“It’s going to be a long time before mass tourism comes back because people aren’t going to want to travel, and they’re certainly not going to go on a cruise ship for a long time,” says Lindahl, whose Norwalk, Conn., firm advises institutional clients on currency strategies. “It’s not the first thing people or businesses are going to spend their money on if they’re tight for money. Tourism might not recover until two years from now and, until then, unemployment in that industry will still be there.”
Lindahl sees more deep losses ahead for stocks, and recommends haven assets: gold, the euro, and Japanese yen.
Bill Priest, executive chairman and co-CIO at Epoch Investment Partners in New York, also sees the potential for a long and arduous recovery process. “The question is the shape of the recovery, and there are all kinds of letters,” says Priest, a member of the Barron’s Roundtable. “Is it a V-shape? Absolutely not. Is it going to be a U? Not really. It’s more the Nike swoosh: sharp down, slow way back up.”
Noting that stock-market performance is forward-looking, Priest says he expects shares to rebound well ahead of the economy. Barring a second wave of coronavirus infections, he thinks that stocks might have bottomed in late March. “We might have seen the lows if—and it’s a big if—there is no resurgence of the virus as we open up the economy and people who are sick and tired of staying in their homes start to socialize,” he says.
Priest, whose firm manages more than $25 billion, says the market’s health also will depend on the prevention of another significant shock in the credit markets. The Federal Reserve has pulled out all the stops since early March to prevent that. It has dropped interest rates to near zero and rapidly unveiled a collection of facilities aimed at providing liquidity to stressed lending markets.
“When you look at all of these programs [the Federal Reserve has] put in place, we run out of letters in the alphabet,” he says, referring to lending facilities such as the Main Street Lending Program (known as MSLP) and the Term Asset-Backed Securities Loan Facility (TALF). “This is an enormous amount of support.”
Nearly 90% of Big Money investors approve of the Federal Reserve’s moves to combat the coronavirus crisis’s impact on financial markets, and a near-equal percentage give thumbs up to public health officials’ response to the outbreak. President Donald Trump, in contrast, gets a vote of confidence for his handling of the health crisis from just 48% of poll respondents, while only 45% express confidence in the response of Congress.
“[Federal Reserve Chairman] Jerome Powell is a hero,” says Keeling. “He didn’t blink, he didn’t hesitate, he went at it with full force, and that has really helped. For that reason, we think it is unlikely that stocks go back to the March low, because that was a panic-selling, lack-of-liquidity-driven event.”
By quickly buying hundreds of billions of dollars of securities, the Fed provided price support and likely prevented—or merely delayed—a wave of defaults in the corporate and municipal bond markets.
“I’m a capitalist; I think that if you’re speculating and taking risk, you should bear the responsibility if that risk doesn’t work out,” says Grimes. “But with this virus, it’s an exogenous, nonfinancial shock, and the Fed is really just making people whole. I applaud them for that. If otherwise very viable businesses and municipalities all of a sudden defaulted through no fault of their own, that would be a travesty.”
While some Big Money investors praised the Fed for moving quickly when it needed to, they worry about the long-term implications of its support. Rock-bottom interest rates never reverted to pre-financial-crisis levels a decade after that debacle, and the Fed’s balance sheet remained bloated. Priest wonders whether the Fed’s current support for riskier markets will be withdrawn.
“My biggest fear is that we’ve entered a world of big government in the United States,” he says. “You have to allow companies to fail—what the economist Joseph Schumpeter called creative destruction. You don’t want to keep stale industries or companies alive, and I’m worried that the U.S. has gone down this path. Once government gets to be your partner, it’s going to be very hard to get rid of government as your partner.”
Nearly 50% of Big Money respondents grade President Trump an A or B for his handling of the current financial crisis. Fifty-six percent expect the president to secure a second term in November, while 89% predict the Republican party will keep control of the Senate, and 75% say Democrats will continue to rule the House of Representatives.
Several respondents indicated in follow-up interviews that the election effectively would be a referendum on the president’s handling of the federal government’s response to the coronavirus. Priest expects the state of the economy to be a stronger factor this fall.
“There will be a lot of talk about could we have managed this crisis better,” he says. “Regardless of who’s president, you can always manage a crisis better, because it’s not a crisis if you saw it coming; then it’s just a problem. I think voters will look past that.”
If it weren’t for the coronavirus outbreak sweeping the globe, the coming presidential election might have been a much more pressing issue for investors this year. Big Money Poll respondents overwhelmingly see President Trump as more market-friendly than his main opponent, former Vice President Joseph Biden. But the candidate whose policies investors perceived to be the riskiest for the market—Sen. Bernie Sanders—is out of the race, allowing the election to take a back seat to other matters in investors’ minds.
“That’s taken some uncertainty off the table,” says Grimes. “The election is much less of an issue [for investors] than it would have been if Sanders was in.”
The rapid moves in stock, bond, and commodity prices of late have opened up new opportunities for investors after a decade in which technology-focused growth stocks dominated the market. “It’s nice to finally be in a market where there’s opportunity, and where active management can add some value,” says Grimes.
He favors shares of companies whose long-term growth trends have been accelerated by the crisis: internet and cloud-computing tech firms, and areas of health care, including genomics.
Technology is still the most attractive sector to invest in today, according to 39% of Big Money investors. Their least-favored sectors include energy and consumer discretionary, both highly cyclical areas facing unique headwinds: oversupply for oil firms and store closures for bricks-and-mortar retailers.
Among individual stocks, Microsoft (MSFT), Amazon.com (AMZN), Berkshire Hathaway (BRK/B), Chevron (CVX), and JPMorgan Chase (JPM) are some of the Big Money investors’ most popular write-in picks. Up 30% this year, Amazon.com also made respondents’ list of the most overvalued shares, along with fellow social-distancing beneficiaries Netflix (NFLX) and Zoom Video Communications (ZM)—up 31% and 133%, respectively.
There are winners from the near-term issues that may also have some continuing structural benefit that doesn’t entirely go away,” says Keeling, whose top holding at the end of 2019 was Microsoft. “But that is already reflected in the prices and valuations of some of these companies.”
Microsoft is also the largest holding at Epoch. Its shares have climbed 11% this year on growing demand for the company’s cloud-computing services.
“Technology is going to be a winner, and pharma may end up being kind of a hero in all this, if they can come up with solutions,” says Priest. “But the real opportunities are going to come from those companies that don’t do well. Walt Disney (DIS) has really been hit hard by this, but if you have a long time horizon, Disney is attractive because the stock just collapsed.”
Disney has been under pressure from all sides during the coronavirus pandemic, as its theme parks close, sports programming is delayed, and movie theaters are shut. It has dropped 30% this year. Priest is bullish on Disney’s pivot to direct-to-consumer streaming, which, like Netflix, is benefiting from people being stuck at home: Its Disney+ offering has hit 50 million subscribers since launching in November.
Health-care stocks, including pharmaceutical giant Merck (MRK), diagnostics firm Abbott Laboratories (ABT), and diversified heavyweight Johnson & Johnson (JNJ), are other recent outperformers still favored by many Big Money investors.
Contrarian investors are on the hunt for bargains in the most beaten-up areas of the market, including the leisure and hospitality industries.
You look at some of the theater exhibitors and what’s happened to their stocks, it’s like no one’s ever going to go see a movie again,” says Bernzott. “I don’t believe that’s the case. People are going to be flying again, they’re going to go back to restaurants, and the hospitality industry will once again be vibrant and thrive. There’s going to be some pain until they come out the other end, but they’re going to be just fine.”
In the beleaguered energy sector, Pinnacle Investment Advisors CIO Brett Kramer has his eye on undervalued midstream players, especially those with low leverage and greater exposure to natural gas than oil. Faced with a glut of supply and evaporating demand, futures tied to crude oil prices have fallen so far as to briefly turn negative last week. But natural-gas prices have held up much better. Kramer points to Antero Midstream (AM), which operates natural-gas pipelines and compressor stations on shale formations in Ohio and West Virginia. Unlike a wide swath of the energy industry, the company recently said it will maintain its dividend this quarter.
Kramer is focused on quality and avoiding energy companies that could be at risk of defaulting. He sees the remaining players coming out stronger after a few quarters, and their shares rebounding.
“We’ve been putting cash to work throughout the past two or three weeks,” says Kramer, whose Tulsa, Okla.-based firm oversees about $400 million in assets. “We know we can’t pick the bottom, but buying when there’s panic in the streets has worked in the past.”
Sixty-five percent of Big Money investors call equities the most attractive asset class today, but some see appealing areas of the credit markets as well. Those don’t include U.S. government debt, which only 1% of respondents favor. Two-thirds predict the yield on the 10-year U.S. Treasury will rise to 1% to 1.5% in a year from a recent 0.594%, near an all-time low. Bond prices move inversely to yields.
“It’s not like 1982, when Treasury yields were 15%,” says Lindahl. “Even if Treasuries go a little bit higher, it’s like buying into the equity markets two months ago—you’re playing at the top.”
As Treasury yields collapsed this year, riskier corporate and municipal bonds traded with unprecedented volatility. The most obvious opportunities to scoop up highly rated investment-grade corporate bonds at March’s steep discounts are likely gone. Municipal bonds are the preferred category for more than half of poll respondents who favor fixed income in the coming year. The Fed is supporting those markets, where spreads are still elevated relative to Treasuries, even if absolute yields are low.
Keeling’s firm has been focused on AA-rated and higher segments of the muni market, while Grimes has started to eye some higher-yield areas for when there’s some greater economic visibility.
“While the bearish case still exists, the high-yield muni space is the exact opposite of where you’d want to be,” says Grimes. “So, we’re waiting there. But at some point when there’s a recovery, there are going to be some big opportunities. You just have to be selective.”
Barron’s will check in with the Big Money managers again in October. Let’s hope their predictions are on the money, and that the long process of recovery—for the economy, the markets, and the world—will be well under way.
Barron’s reader poll
Barron’s readers are wary of stocks’ progress this year, but many expect the market to perk up in 2021. Like the professional investors who responded to our latest Big Money Poll, readers consider the potential spread of the coronavirus pandemic, a recession, or a depression the biggest risks facing the market. More than 1,700 readers responded to our survey, conducted in mid-April.
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