Morgan Stanley
  • Wealth Management
  • Sep 14, 2020

Answers to Top Questions From Investors

Markets have been volatile in 2020, but we have reason to be hopeful that the worst economic damage was confined to the second quarter. Here are answers to clients’ key questions about their portfolios.

This has been an unprecedented year for our nation and for markets. Since the Feb 19 high, the S&P 500 Index, a broad benchmark of the U.S. market fell 34% through late March—the fastest and steepest decline in history—and then recouped those losses, reaching new highs by August. Investors have gone from near-euphoria about the strength of the U.S. economy to fully accounting for a “sudden stop” recession, to looking past the impact of the pandemic to the economic recovery expected in 2021.

While economic forecasting in this environment is challenging, each day brings new information about how to think about the future, and we can use market history, where applicable, as a guide. Our clients understandably, are asking many of the same questions. Here are my latest answers:

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  • Why has the market been rising, even as COVID-19 continues to spread? Investors have been encouraged by improvements in manufacturing and housing, better-than-expected second-quarter earnings, and extremely low interest rates. Mostly, however, investors seem to be looking past the pandemic to the bigger picture recovery expected in 2021. Due to expectations for additional government stimulus, ongoing global recovery and an expected rebound in cyclical sectors, we continue to forecast a V-shaped economic rebound.
  • What are policymakers doing and will it help? Policymakers appear willing to do whatever it takes to stem the crisis. The Federal Reserve has cut short-term interest rates to near zero and, like all G4 central banks, is implementing a massive program of quantitative easing and other measures to shore up credit markets. On the fiscal side, Congress passed the $2 trillion CARES Act, which included direct aid to workers and businesses, as well as tax relief. We expect to see additional aid approved. All these programs should continue to have direct positive benefits to help offset the economic contraction.
  • How could the progression of the pandemic affect your forecasts? Our analysis suggests that even if there is another surge in cases, the U.S. is unlikely to resume a full shut down again. Investors are very focused on progress towards a vaccine. While delayed reopenings will continue to affect already depressed sectors like transportation, hospitality, restaurants, recreation and other direct consumer services, they should still show improvement in the third quarter and other sectors tied to global trade, manufacturing and housing should show more robust improvement.
  • How might the 2020 election impact markets? Politics may loom large, but material policy shifts that could have a major impact on markets seem unlikely in the near term. While some polls have suggested that a Democratic sweep in November is possible, we don’t see immediate tax hikes and costly expansions of the health care system as a likely outcome if that were to happen.
  • What risks are investors overlooking? One of my biggest concerns is the potential for rising inflation. One inflation measure, the 10-year “breakeven” rate, has risen from 0.5%, in late March, to about 1.7%. While that is below the Fed’s target rate of 2%, the combination of money-supply growth and a weaker dollar, among other factors, point to rising inflation expectations that could raise long-term interest rates and lower equity valuations.
  • What is your U.S. economic forecast? Morgan Stanley Research economists currently forecast third-quarter U.S. GDP growth up 33% annualized compared to second quarter GDP, which fell 32%. For full year 2020, GDP is tracking to decline 3%, followed by 6.4% estimated growth in 2021.

Some market shifts in 2020 have been fast and gut-wrenching, but not completely irrational. With policymakers taking action, we have reason to be hopeful that the worst economic damage can be confined to the second quarter, setting the stage for a healthy rebound into 2021. The next few months will be critical to limiting the damage—and the repairs ahead.