What’s Next for Markets as Lockdowns Lift: A Multi-Asset View

With markets starting to make a comeback, our Multi-Asset Solutions CIO Ed Perks looks ahead to second half of the year, including the implications of the US economy opening up, the ongoing impact of the massive monetary and fiscal response, and the risk for a wave of downgrades and defaults.

Katie Klingensmith: COVID-19 has really taken the market for a rough ride this year. And without asking you to make medical predictions, to be an epidemiologist, what do you see happening going forward right now?

Ed Perks: Well, certainly the global pandemic caused by COVID-19 is really unlike any other event we’ve experienced, especially as it relates to its impact on the economy. And then, along with that has come record levels of volatility and dislocations across a broad range of financial markets. First, maybe it’s worth just discussing the current environment as the US economy is really experiencing a depression-level contraction in growth. And, unfortunately, a similar-type increase in unemployment.

I think what’s made this event so unique is, one, that it’s a global crisis and it’s the result largely of government orders to shelter in place, broadly, across the economy in order to stop the virus from spreading. And, thankfully, those efforts have been successful and certainly have saved numerous lives. I think looking forward, now, unfortunately may come the hard part of kind of picking back up the pieces of getting the economy functioning, all while still trying to be diligent about the virus and certainly the risks that exist around a reacceleration of infections or second waves. That certainly could lead to additional measures to quarantine/shelter in place. So, you know, while I think we are starting to take important, meaningful steps forward, we must also kind of be prepared for occasional steps backwards.

I think as we look at financial markets, the first half [of the year] will certainly be remembered for the extreme record level of volatility, the broad dislocations that we’ve experienced across markets, the sharpest-ever correction from a record high in equity markets, to what now has been an equally ferocious recovery—at least in US equity markets—with broad benchmarks recovering as much as two thirds of the drawdown.

As we think more about the second half of the year, especially from current valuation levels, I think we have to learn to balance this need to reopen and recover some of the jobs that have been lost while also changing behaviors to prevent further second waves of infection.

So, as we’ve seen, I think markets are going to remain very sensitive to advancements in treatment and therapeutics. And certainly, the path to vaccine discovery, and while we all can remain very optimistic and hopeful, I think we really have to acknowledge that, you know, tremendous challenges lie ahead and that it’s highly unlikely that all the news flow we will be getting will be positive.