Morgan Stanley
  • Wealth Management
  • Apr 13, 2020

Answers to Top Questions From Investors

Markets are moving fast and often in the wrong direction. Here are my answers to clients’ key questions about their portfolios.

We’re living through a period of unprecedented market volatility as well as remarkable velocity of price movements. Since the Feb 19th high, the S&P 500, a broad benchmark of the U.S. market, has fallen about 20%. Investors have gone from near-euphoria about the strength of the U.S. economy to fully accounting for a “sudden stop” recession.

While economic forecasting remains blurry, each day brings new information about how to think about the future, and we can use market history, where applicable, as a guide. Our clients understandably, are asking many of the same questions. Here are my answers to the questions I hear most:

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  • How do you explain recent market volatility? The bear market is the result of investors dealing with the fear and uncertainty of a global pandemic, combined with a drastic slowdown in economic activity and an oil-price collapse. Illiquidity has played a big role in volatility, as investors sold securities to raise cash. Too few buyers, when nearly every asset class was declining in price, became a recipe for the kind of extreme volatility across asset classes we've been seeing lately.
  • What are policymakers doing and will it help? Policymakers now seem fully on the case and appear willing to do whatever it takes to stem the crisis. The Federal Reserve has cut short-term interest rates to near zero and, like all G4 central banks, is back at it with bond-buying, implementing a massive program of quantitative easing and other measures to shore up credit markets. On the fiscal side, Congress has passed the $2 trillion CARES Act, which includes direct aid to workers and businesses, as well as tax relief. We see all these programs as having direct positive benefits to help offset a second-quarter economic contraction.
  • How could progression of the pandemic affect your analysis? I find the Johns Hopkins disease progression dashboard a useful tool. Disease transmission tends to follow logarithmic models, and the experience of other countries can provide some guideposts for how the U.S. may fare. Our analysis suggests that the U.S. may be on a path to restoring economic activity by June. I’m closely watching to see if there are any resurgent infection rates in China, as well as consumer psychology to see if what we’re modeling remains on track.
  • What is your recession forecast, given social distancing policies? It’s not a pretty picture. Morgan Stanley Research economists currently forecast second-quarter U.S. GDP to fall sharply. But in the second half of 2020, we estimate a slow return to normal household and business activity and we see potential for a rebound in 2021. Our global-growth forecasts have also come down, and we foresee a global recession for the first half of 2020, followed by the start of recovery in the second half.

Market shifts have been fast and gut-wrenching, but not completely irrational. With policymakers taking action, we have reason to be hopeful that the worst economic damage can be confined to the second quarter, setting the stage for a healthy rebound into 2021. The next few weeks could be critical to assessing the damage—and the repairs ahead.