Survey: Experts see solid rebound in rattled markets following ‘two-quarter’ coronavirus contraction

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Markets are whipping back and forth as investors judge the economic impact from the novel coronavirus, but experts say it’s likely going to get worse before it gets better.

The current economic pullback will last for two quarters, according to the majority (or 63 percent) of investing professionals surveyed for Bankrate’s First-Quarter Market Mavens poll. Two respondents said the contraction could last three quarters, while one participant said he didn’t know.

All of this points to a bumpy ride for investors in the months ahead — something they likely already know too well. U.S. stocks had their worst quarter since the financial crisis in the first three months of 2020, with the S&P 500 erasing nearly three years of gains in a span of 33 days. Since then, the broader index has recovered nearly a third of those losses.

From bars and restaurants to gyms and movie theaters, businesses are closing all around the nation as states seek to curb the spread of the deadly virus that’s infected more than 200,000 people coast-to-coast. It’s already taken a toll on the U.S. economy, with 3.3 million Americans filing for unemployment in the week that ended on March 21 — the highest weekly increase ever.

“Next quarter will be terrible, and the quarter after quite weak,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. “At that point, however, the accrued stimulus [from] both monetary and fiscal should allow a significant recovery.”

Key takeaways:

S&P 500 will close out 2020 well below its record high

Even though it’s impossible to know when the dip in stock prices may end, market professionals are optimistic that a rebound will occur at some point this year.

The average forecast for the S&P 500 between now and the end of 2020 is 3,093.33, nearly 22 percent above its close of 2,541.47 on March 27, the date Bankrate’s survey closed. Better yet, all of the survey respondents who provided forecasts for the broader stock index predicted that it would rise from its March 27 position, with forecasts ranging from 2,800 to 3,500.

“The economic recovery will be quicker and more sustained in the U.S., which should help U.S. stocks,” says Chuck Carlson, CEO of Horizon Investment Services.

But even though experts are increasingly optimistic, the average forecast implies that the S&P 500 will close well below its all-time high of 3,386.15 reached in mid-February.

Market professionals have an increasingly bullish outlook

Experts from across the gamut — whether it’s economists at the Federal Reserve to officials in the Trump administration — unanimously agree that the U.S. economy is likely already in a recession because of the coronavirus. That corresponds with the end of the country’s 11-year bull market run on March 11.

But as one cycle ends, investors are going to usher in the beginning of another cycle — and that paves the way for more bullish prospects.

Three out of four experts (or 75 percent) said stock returns over the next five years would be higher than normal, while just 25 percent said results should be about the same as the historical average.

Those expectations are significantly more upbeat than the prior survey’s results. In the fourth quarter of 2019, 69 percent expected returns to be lower than normal, while 31 percent said returns would hold close to their historical norm. Not one predicted that returns would be higher than normal.

How can investors craft their portfolio to see the biggest returns? Likely through U.S.-based equities and growth stocks.

Half of respondents preferred growth stocks, the most of any category. Meanwhile, 12.5 percent preferred value stocks, and nearly two in five experts (or 37.5 percent) said returns would be the same for both.

The majority (or 88 percent) of experts also reported that portfolios more exposed to domestic markets would provide better returns than those exposed to global equities. That compares with just one respondent (or 13 percent) who said returns would be about the same between the two. It also marks a significant change from the prior survey period, with slightly more than half of respondents preferring international stocks.

“There is pent-up demand caused by the closings from the coronavirus. The economy can re-inflate fast, and growth [stocks] usually leads the way in such an environment,” says Ben Barzideh, wealth advisor at Piershale Financial Group. “U.S. stocks are more discounted, with higher potential for quick recovery from the current bear market. Structure and demographics are better in the U.S., with higher potential of earnings growth.”

10-year Treasury yield will rebound but still hold near record lows

Casting a shadow over the extreme volatility in stocks has been the Treasury market. Yields across the curve have plunged to their lowest levels ever, while two shorter-term Treasurys dipped into negative territory for the first time ever. Investors are clamoring for safe haven, liquid assets, as the novel coronavirus threatens growth and pummels stocks.

The 10-year Treasury yield — which acts as a benchmark for other types of credit in the economy such as mortgage rates — has held below 1 percent for most of the past month. But don’t expect that to last for much longer.

The average forecast among respondents called for a yield of 1.39 percent a year from now, up 71 basis points from where it stood on March 27. It does, however, show a steep pullback from the average fourth-quarter forecast of 2.14 percent.

“Stocks are deeply discounted, and there has been a record amount of stimulative measures taken by the Fed and Congress,” says Barzideh. “Fixed income and equities will do well since there’s no fear of raising interest rates anytime soon.”

Bottom line

The coronavirus and the subsequent policy response from both Congress and the Federal Reserve will likely continue to drive markets over the next year, experts reported in Bankrate’s latest survey.

That’s likely because the coronavirus will have some residual effects, long after the rate of infections slows.

“Depending on how long the self-quarantine lasts, there could be dramatic shifts in consumer and business behavior,” says Sam Stovall, chief investment strategist at CFRA Research. “There could be fewer meetings that require travel that are replaced with webinars and ‘virtual’ meetings.”

The coronavirus is touching almost all corners of government, economics and corporate profits. It’s essential that economic activity slows to curb the spread of the virus, but policymakers’ response can help lessen the extent of that blow.

“The coronavirus and the health care response will determine the depth and duration of the downturn, while economic policy measures taken today will determine the trajectory and shape of the recovery,” says Brian Nick, chief investment strategist at Nuveen.

Experts caution that it’s important not to dramatically change your investment strategy in times of economic and market distress. That includes deciding to save less for retirement or dramatically reducing your exposure to equities when markets are choppy.

It’s important that investors keep a long-term perspective, with the idea that one day’s losses can be reversed into another day’s gains. Bankrate’s survey suggests market professionals are optimistic about the longer-term outlook.

“The U.S. was a bit less economically fragile going into the pandemic slowdown,” says David Lafferty, chief market strategist at Natixis Investment Managers. “It should prove to be a bit more resilient coming out.”

Methodology

Bankrate’s first-quarter 2020 survey of stock market professionals was conducted from March 19-26 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Brad McMillan, chief investment officer, Commonwealth Financial Network; Sam Stovall, chief investment strategist, CFRA Research; Chuck Carlson, CEO, Horizon Investment Services; David Lafferty, chief market strategist, Natixis Investment Managers; C.J. MacDonald, CFA, client portfolio manager, GuideStone Capital Management; Ben Barzideh, wealth advisor, Piershale Financial Group; Brian Nick, chief investment strategist, Nuveen; and Robert Brusca, chief economist, FAO Economics.