The below report was done by Jae Park, Chief Investment Officer, and Michael Giles, CFA, Chief Investment Risk Officer from Loomis Sayles.
This time really is different
It’s been said before, but the truth is, this crisis appears to be very different than others we’ve experienced. It’s not an asset bubble tied to exuberance, greed, default, fraud or mismanagement of a country, currencies or anything else in our man-made economic system. This crisis has potential for a much more severe impact because all non-essential economic activity has halted abruptly. The question is, where is the bottom? The answer depends on policy actions and how we all collectively handle this crisis.
We have entered the downturn and the credit cycle is resetting. Every day we go without a nationwide lockdown order in the US, the odds of a severe downturn rise. There’s a multiplier effect on the length and severity of the downturn as the virus spreads exponentially. The start date of an effective, broad US shutdown is the critical factor.
Our Macro Strategies team has laid out the following base case. Assuming the US essentially shuts down around April 1, the US economy should recover in the third quarter. The virus would peak around April 20, with new cases slowing at that point and quarantine being lifted in early May. However, delaying lockdown by even a month would overwhelm the healthcare system, risking greater loss of life and no economic recovery until the fourth quarter or beyond.
Going into this crisis, our teams were very defensively positioned. They had ample liquid reserves on hand because we’ve been anticipating the end of the cycle and eventual downturn for quite some time. The reserves have been useful for opportunistically legging into risk positions when potential attractive valuations appear. Loomis Sayles tends to be a provider of liquidity when there’s panic selling in the markets. Our investors take positions in securities that they believe will revert to normal valuations in the long run. This is the type of environment where we rely on fundamental research to build long-term value into client portfolios.
Is it time to buy?
Current valuations across many sectors indicate there may be compelling value right now. We want to be sure to leg in before it’s too late. Our teams are focused on security-specific stock and bond opportunities.
We’re seeing some stabilization in the markets. Over the past few weeks, it’s fair to say certain markets appeared broken, including stalwarts like municipals and Treasuries, which experienced unprecedented volatility. The Fed’s clear commitment to doing whatever is necessary to keep markets functioning and the federal relief legislation seem to have had a calming effect.