We work with Wilshire, one of the nation’s largest investment research consultants, to bring you investment advice and market insights. Each quarter in The Macro View, we summarize Wilshire’s viewpoint on the macroeconomic landscape and the asset classes that may make up the core components of your investment portfolio.
What’s macroeconomics, you ask? It’s the study of large-scale or general economic factors, such as interest rates and national productivity. Let’s dive into the latest quarter.
Best quarterly performance for U.S. equities in decades
Global financial markets rallied during the second quarter of 2020, marking the best quarterly performance for U.S. equities in decades, as investor sentiment rose on the coattails of swift and substantial government stimulus and intervention. Even with this recent recovery in equities and expansion in corporate earnings multiples, equities are not necessarily expensive relative to their historic values.
Furthermore, the Fed’s dot plot (a chart which shows projections of future fed moves) indicates accommodative monetary policy through 2022, which may continue to benefit equity prices. The dot plot is a chart that records each Fed official’s forecast for the short-term interest rate. It’s currently in a target range between 0-0.25 percent, the lowest since Great Recession-era levels.
While investors have enjoyed the recent drop in equity volatility and the rise in prices, the term structure of the CBOE Volatility (VIX) Index does continue to imply an increase in equity volatility heading into the U.S. election (which is typical of most election seasons).
In this quarter’s Macro View, Wilshire highlights trends in COVID-19 data, including improvements in the mortality rate and advancements in therapeutics. They also discuss the economic environment against the backdrop of this health crisis.
Asset class perspectives — MoneyLion portfolios
We’ve summarized Wilshire’s Q3 2020 viewpoint on the core components of MoneyLion members’ investment portfolios:
Fixed income vs. equity
Given the economic uncertainty and the lack of clarity into both GDP and corporate earnings (two indicators of economic health), assessing relative valuations between equities and fixed income is less reliable. Wilshire believes that it is best to keep allocations consistent and that it would not be prudent to add any more active risk to try to take advantage of current valuations.
Global ex-US vs. US equities
Wilshire sees some valuation opportunities overseas and is concerned with the risk of a weaker US dollar ahead, which would benefit non-U.S. equity returns. Therefore, Wilshire is remaining neutrally balanced between global and US stocks. Having both regions as part of a portfolio helps keep balance and limit volatility.
Emerging markets vs. developed equities
The risk that COVID-19 presents to certain regions of emerging markets, particularly with respect to the more limited ability to deal with the humanitarian crisis of this pandemic, increases the uncertainty in the outlook for emerging vs. developed equities. At the same time, Asian economies have done a better job of managing the spread of the virus. Wilshire continues to remain neutral in emerging markets vs. developed markets at this time. This continues to be a small part of the portfolio to take advantage of diversification and potential opportunities while managing risk.
Macro outlook: Gloomy global growth overall
Overall, the global economic outlook has remained gloomy and uncertain, particularly given the negative narrative of higher COVID-19 rates. The International Monetary Fund (IMF) estimates a real annual global GDP growth rate of approximately -5.0% in 2020, with U.S. GDP growth expected to be -8.0%.
Forecasts for U.S. GDP growth in the second quarter have been highly variable, with the consensus estimates in Bloomberg showing -35% (the initial GDP report in late July came in slightly better than these estimates at -32%). Despite this pessimism, both the hard and soft economic data continues to indicate a notable improvement in May and June.
Signs of hope: Consumer spending is up
The V-shaped recovery in the Purchasing Manager Services Indexes (PMIs) in Exhibit A provides an early reason for optimism. Specifically, the jump in Industrial Production and Retail Sales on a month-on-month basis is encouraging (Exhibit B), and while the recovery in the data has moderated more recently, the sharp increase in Personal Spending (Exhibit C) is another indication of the potential resilience of the U.S. consumer, particularly as a result of targeted fiscal stimulus.
Most of the decline in GDP in the first quarter was attributable to weakness in Personal Consumption, and therefore, indicators such as retail sales and personal spending are important markers for gauging the recovery of the U.S. consumer and ultimately GDP for the remainder of the year.
Additional signs of economic improvement in US
In the U.S., there have been broad signs of economic improvement. In addition to the improvement in Industrial Production, Retail Sales, and Personal Spending, we are seeing:
- Better than expected recovery in Unemployment
- Increase in dining out activity (Source: Open Table)
- Two straight months of increases in Leading Economic Indicators
- Recent spike in Home Purchase Applications
- Recovery in both Existing and New Home Sales
While the recent rise in COVID cases may result in some moderation in the recovery in economic data, there are reasons to believe that the current economic projections remain overly bearish (overly negative).
In addition, the decline in the COVID mortality rate and advancements in therapeutics also provide for a progressively positive outlook in our ability to manage this virus, which in combination with additional targeted fiscal stimulus, may facilitate the willingness for households to increase spending activity, thereby fostering support for an economic recovery.
Investor sentiment is the general mood among investors regarding markets or assets, and it may be looking up but showing signs of complacency.
During the second quarter, there was a gradual decline in risk metrics across markets, liquidity improved, and interbank stress and corporate funding stress subsided.
Volatility declined in both equities and fixed income markets, and interest rate volatility has fallen to historically low levels. While it’s not surprising to see low implied interest rate volatility, particularly given the expectations that the Fed will maintain its current accommodative policy through 2022, ultra-low levels of implied volatility may also be indicative of complacency regarding the future path of interest rates, which is a risk that Wilshire remains mindful of.
Outlook: What to watch in the months ahead
Although the future remains somewhat clouded with economic and political uncertainty, the hard and soft economic data continues to indicate a notable improvement in the latter half of the second quarter. However, Wilshire is keenly aware that the global pandemic continues to introduce unforecastable consequences across many asset classes.
As we head into the fourth quarter, Wilshire will continue to evaluate market conditions and expectations over the coming months, with particular attention to the COVID crisis, global economic conditions, and the U.S. election. They’ll continue to evaluate the potential outcomes of the U.S. election and the resulting impact on global financial markets as well as the potential impact of foreign policy on large emerging markets constituents such as China.
As always, it is good investing behavior to keep a diversified portfolio, which MoneyLion members can maintain by choosing one of seven options based on their risk preferences. Additionally, investing on a recurring basis using Auto Invest allows MoneyLion members to stay consistent through macroeconomic developments without attempting to time the market.
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