Midyear Outlook: Charting the Path of Demand Destruction

By Lauren Goodwin, CFA. Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management

The Multi-Asset Solutions team’s full 2020 Midyear Outlook can be accessed here.

As we turned the calendar to 2020, we were concerned about financial market outcomes for the year. At the macro level, things looked good. The economy was progressing at a moderate pace, the labor market was strong, consumers were spending, and financial conditions were favorable. Digging deeper, cracks in the expansion’s foundation had become more apparent. Profit margins had clearly peaked, earnings were under pressure, and leverage was building.

COVID-19 was a truly unpredictable risk. The size and scale of its impact has been felt globally in health, economic, and market risks. The resulting “Great Lockdown” has formed a crater in economic output as well. Global GDP is set to contract by around 45% in Q2 2020, according to the IMF’s June forecasts. In the U.S., more than 23 million people lost their jobs, at least temporarily.¹

Even as lockdown restrictions have eased, areas facing outbreaks will find it hard to sustain economic growth if consumers retrench when seeing new spikes in hospitalization rates.

The path forward

We do not have a crystal ball, and investment always involves risk. Still, we have identified two essential factors to assessing investment opportunities moving forward: the virus’ path and policy effectiveness.

Our base case view acknowledges that policy support has been effective in eliminating worst-case scenarios for households and corporations, but expects investment and consumer spending to be damaged for some time. The U.S. was not successful in containing the first wave of COVID -19 infections, meaning that its path to conquering the virus will be uneven. Even in places where restrictions are eased, physically vulnerable or otherwise risk-averse populations are likely to remain hesitant to re-engage with the economy.

Economic activity likely reached a bottom in May, and will rebound quickly from its lows, but only to a point. We anticipate that a full recovery could take two years or more, creating a drag on consumer prices, corporate profits, worker wages, and consumer spending.

COVID’s impact to our investment thesis

Our instinct is to remain conservative in our investment policy until we see clear evidence that the U.S. economic and corporate environments are on stable footing. We favor a balanced approach to income generation across equities and fixed income, allowing investors to participate appropriately in any upside while relying less on price appreciation to add value to their portfolios. This means focusing on fortress balance sheets and viable business models that can bridge the economic gap created by covid-19. Careful credit analysis and security selection are key.

We expand on our views in our new Midyear Outlook. The following takeaways are key for investors:

Acknowledging uncertainty

In times of high volatility, any move away from investors’ strategic benchmark will be more acutely felt. Focusing on your long-term goals – and prioritizing wise investment over the maximization of short-term returns – is paramount.

A muddle-through economy has implications for countless factors important to investors: inflation, interest rates, prices, and regional preference. Our new midyear outlook outlines our perspective on these items, where our view could change, and how to translate that perspective into thoughtful portfolio management.