Our latest thinking on the economy and your Portfolio Advisory Services account

BY STRATEGIC ADVISERS INVESTMENT TEAM - May 7, 2020


Key takeaways

  • The response from the federal government to support the U.S. economy has been sizeable and swift.
  • We are monitoring all facets related to the coronavirus, as well as sentiment and changing economic data.
  • We are watching for early signs of economic improvement that further help support stocks.
  • Within Portfolio Advisory Services accounts* we are maintaining a more conservative investment positioning and have increased exposures to short-term investments to enhance investment flexibility in your account.

Policy responses help soften the blow to U.S. economy

The coronavirus pandemic has continued to be a tragedy for millions around the world. While efforts to manage the virus are yielding some positive results from a human health perspective, they have continued to have widespread impacts on global economies. Although stock and bond markets have recovered some of the sharp declines we saw in March, we anticipate bouts of volatility in the coming months. That’s because the path of the virus remains uncertain and the “reopening” of the economy is likely to be gradual and uneven.

However, the response from the federal government to support the U.S. economy has been sizeable and swift. These efforts could lead to a less severe contraction than many had feared in the early days of the outbreak and help bridge the gap to when the U.S. economy recovers. Policymakers have taken several actions over multiple phases1, including two new recent ones:

  • The third phase was the $2 trillion CARES Act, which sought to provide financial assistance to businesses, as well as individuals, through either direct aid or enhanced unemployment benefits.
  • By late April, a fourth phase of economic relief, providing additional support for small businesses, medical workers, and virus testing for states, was signed into law.

Today, debate over another round of fiscal relief is underway and it’s likely that from here discussions may get more politically contentious. In the meantime, announced fiscal packages should help soften the blow to the economy and it’s likely one reason why markets have bounced back. This could allow long-term investors to benefit from any eventual economic recovery.

Longer-term, higher national debt levels will likely lead to slower growth and low interest rates, but we believe they are extremely unlikely to lead to near-term concerns on the creditworthiness of the U.S. government. As for inflation, the potential long-term impact is less clear. This will be an area of focus as we emerge from the pandemic. But for now, we have very few concerns of inflation being a near-term issue for the economy, due to the drop in demand for goods and services around the world.

What we are watching

Beyond analyzing policy responses, we are closely watching all facets related to the coronavirus, as well as sentiment and changing economic data. That includes tracking numerous high-frequency indicators for early signs of improvement that may help support stocks. Strong recoveries often occur when news headlines appear the bleakest.

Here are some key indicators we’re watching to track potential economic and market improvement:

Proprietary COVID-19 Models & Medical Insights: Our quantitative models can provide a guide as to how countries and states are handling the medical impact of COVID-19, so that we can gauge the potential timing of economic resumption. Additionally, insights from medical experts help us understand the timelines for improved testing efforts, as well as development of therapies or vaccines for COVID-19. Any breakthroughs could sharply accelerate an improvement in the global economic outlook.

High Frequency Economic Indicators: The U.S economic recovery will likely be gradual and uneven as states “reopen” at different times over the next few months. To assess improving economic activity, and judge the potential support for stocks, we will follow various high frequency indicators. These include:

  • Initial Weekly Jobless Claims - A slowdown in the growth rate of new claims may signal a resumption of economic activity, like consumer spending, and it has historically coincided with more stable stock markets.
  • Manufacturer New Orders - Watching new orders placed by purchasing managers from hundreds of manufacturing companies, as well as inventory data reports, helps us understand how producers are managing their supply chains. Identifying if they are ramping production up or down can be a compelling signal of economic recovery.
  • Credit Card Spending Data - Analyzing this data allows us to track the activity level of consumer spending across various segments of the economy. This is particularly important given that consumer spending drives roughly two-thirds of U.S. economic growth.
  • Senior Loan Officer Surveys - Monthly surveys of over 100 banks helps us understand the willingness of banks to lend, and businesses and households to borrow. Improving credit creation is often an early sign of an improving growth outlook.

Corporate Earnings Outlook: We are working closely with our deep pool of internal and external research professionals and portfolio managers to understand the outlook for corporate earnings. Importantly, not all market segments, like energy, tech, or banks, or companies will see the same earnings impact or recovery. In this environment, well-staffed actively managed investment strategies backed by deep research resources may help add value.

Short-term investments can enhance investment flexibility

The COVID-19 outbreak has led to considerable uncertainty regarding human health, the economy, and corporate earnings. It’s why we believe markets will continue to experience bouts of volatility. Therefore, we’re maintaining a more conservative investment positioning. For most clients, that means overall stock allocations that are several percent below their long-term asset allocation mix. We also continue to emphasize higher quality stock and bond investments, which may be more resilient versus broader markets over the coming months.

However, market volatility has led to the emergence of some potential long-term investment opportunities. For example, based on certain technical factors and valuation measurements, stocks of U.S- based small companies and value stocks bear close watching. Given this backdrop, we’ve increased exposures to short-term investments to enhance investment flexibility. This can allow us to act quickly when we believe opportunities arise.

We’re here for you

We often see investors become anxious about market volatility and unnerving news headlines. This feeling is further heightened given the economic recession and uncertainty regarding the coronavirus. If you are dealing with the stress of what the economic contraction and virus outbreak means for you, you can rest assured that we will seek to navigate your critical assets through this challenging and complex situation. Through the ups and downs that lie ahead, we are here to help. As always, we aspire to give you peace of mind that the investment outcomes we work for are consistent with your financial goals.

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