Economy shifts downward

The US is entering a recession due to COVID-19 and the massive response.

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Key takeaways

  • We believe the US is entering an economic recession.
  • The continued spread of the virus and the growing scope of the clampdown on public activity suggest it is too soon to forecast the length and magnitude of the slowdown.
  • Historically, more defensive assets (such as high-quality bonds) tend to outperform more economically sensitive assets (such as stocks).
  • Focus on your long-term goals and asset mix.

Historic levels of market volatility washed over the globe in recent weeks. Uncertainty driven by the economic and market events surrounding the coronavirus can divert investors from their long-term financial plans and result in investment decisions overly focused on near-term events.

The following points outline why we believe the shifts in business cycle phases influence relative asset performance patterns and can be used to help create portfolio tilts over the intermediate term. The start of a recession requires prudent asset allocation that balances near-term events with longer-term investment objectives.

How does the business cycle affect portfolios?

  • The business cycle, which is the pattern of cyclical fluctuations in an economy over many months or a few years, can be a critical determinant of asset market returns and the relative performance of various asset classes.
  • Our quantitatively backed approach utilizes high-quality economic indicators to identify the shifts and inflection points between the business cycle's 4 distinct phases: early-cycle, mid-cycle, late-cycle, and recession.
  • For more details, read Viewpoints on Fidelity.com: How to invest using the business cycle and Sector investing using the business cycle

Where are we now?

  • We believe the US economy is at the onset of recession. The coronavirus outbreak and the subsequent response is an exogenous shock that is turning late-cycle vulnerabilities into a steeper economic slowdown.
  • We don't know whether the economic slowdown will be brief or prolonged. The continued spread of the virus and the growing scope of the clampdown on public activity suggest it is too soon to forecast the length and magnitude of the slowdown.
  • During recessions, monetary and fiscal authorities play an important role in determining the future path of the economy. A policy response, highlighted by aggressive central-bank actions, is underway.
  • We're monitoring economic and policy trends closely in order to gauge their potential impact on financial markets.

What is the recession phase?

  • A recession is characterized by a contraction in economic activity. Typically, corporate profits decline, manufacturing activity falls, unemployment rises, and credit is scarce.
  • Monetary policy typically becomes more accommodative. Eventually, policy support, inventory declines, pent-up demand, and other factors set the stage for the next recovery.

How does the recession phase affect asset performance?

  • Historically, more defensive assets (such as high-quality bonds) tend to outperform more economically sensitive assets (such as stocks).
  • Higher market volatility is typical during recession, as uncertainty around the economic outlook causes greater fluctuations in asset prices.

What does this mean for portfolio construction?

  • The shifts in business cycle phases influence relative asset performance patterns and can be used to help create portfolio tilts over the intermediate term.
  • It is important to remember that cyclical allocation tilts are only one investment tool, and appropriate portfolio diversification is always a priority.
  • Any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

So what should you do? If you have a plan that you believe in, stay the course. Historically, recessions and bear markets run their course, and the market rebounds, often sharply. That's when the patient and consistent investor is rewarded.

If you don't have a plan or you aren't sure yours is still right for you, it's a good time to meet with a financial processional.

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