US Equities: Taking the Long View Through Today's Uncertainties

While the US economy continues to suffer the wrath of the coronavirus, a recovery will eventually come. Franklin Equity Group’s Grant Bowers provides his latest update on the US equity market, and what he and his team have an eye on with a long-term investment view.

As efforts to stem the spread of COVID-19 continue, uncertainty remains high across global financial markets. The pandemic-driven selloff, heightened by turmoil in global oil markets, is unprecedented in its speed and severity. Volatility and correlations across asset classes are reminiscent of the global financial crisis, as investors seek to reduce risk exposure as new information is released daily. The purposeful halting of the global economy is jarring in the short term and raises questions about the pace and timing of the eventual recovery.

Our view of the economic impact in the United States reflects a significant decline in both employment and gross domestic product (GDP) growth over the coming weeks and months. These metrics are likely to remain weak into the third quarter but could start to show some improvement as we enter the fourth quarter of 2020. While it’s clear that the United States will presumably fall into recession (defined as two quarters of negative GDP growth), we see this sharp and severe downturn as temporary.

We have confidence that the unprecedented global coordinated response by scientists, technologists and engineers, working in parallel on a vaccine and therapeutic treatment, will lead us past this crisis. The US economy has tremendous depth and strength; though the crisis will test many areas of the country, we don’t believe it will lead to a global depression or multi-year downturn.

Looking forward, we are closely watching multiple factors as we think about the path to recovery.

  • First, when we look at the countries in Asia where the virus had the earliest impact, new cases have slowed in China and South Korea, people are returning to work and consumers are starting to resume traditional spending patterns. Franklin Templeton’s research teams in Asia have been providing on-the-ground perspectives and insights as the situation evolves in the region. We view this as a good leading indicator that suppression strategies taken in the United States and Europe can be effective at “flattening the curve.”
  • Second, the Federal Reserve acted quickly to inject substantial liquidity into the market. This was followed by a US$2 trillion stimulus package designed to support the economy across myriad segments, corporate and individual. These measures align with broader policies and programs that governments worldwide are implementing in an effort to stabilize the global economy. While it will take time to see these actions have an impact, we believe they can be very effective.
  • Lastly, at the core of these economic challenges is a global health crisis. The pace and extent of our recovery will be very linked to scientific progress on cures, vaccines and/or treatments. These discoveries will have tremendous impact not just on how severe the downturn will be, but also how our lives may be impacted in the years ahead.