Markets have mostly looked past the coronavirus pandemic, but a growing number of experts aren’t entirely convinced the bull market has returned.
Though half of investing professionals say equities are in a bull market, 11 percent are dubbing the current environment as a bear market while one-third say the recent market rally is something else. That’s according to Bankrate’s Second-Quarter Market Mavens survey, which polled 18 participants on where they see equities, Treasury yields and the broader environment heading over the next 12 months. The survey found record division and variation among forecasts.
The differing results reflect just how puzzled many experts have been while watching equities markets quickly rebound in the months since the coronavirus pandemic upended much of the world economy, putting tens of millions out of a job in the U.S. and forcing businesses, restaurants, bars, gyms, retailers and offices nationwide to close amid stay-at-home restrictions.
After erasing nearly three years of gains in March and plunging by more than 31 percent, the S&P 500 recovered most of its losses. It’s still, however, about 6 percent below its all-time high.
Experts say the rally is unlikely to keep up with its current pace. The financial system has a long way to go after one of the worst crises in generations, with investors and firms likely juggling extraordinary uncertainty driven by the strength of the economy’s rebound, unprecedented Fed action and fears of a second wave of the virus.
“There are a lot of cross currents that have made the crazy market what it is,” says Kim Forrest, chief investment officer and founder of Bokeh Capital Partners. “These unusual times are driving unusual markets.”
S&P 500 seen as gaining 1 percent over next 12 months
Even with equity markets taking off for the races, experts in Bankrate’s survey say there might not be much more room left for them to run.
Market professionals’ average forecast for the S&P 500 shows the index closing at 3,127.33 when the second quarter of 2021 ends, suggesting a less than 1 percent rise from where it closed on June 30, when the survey period closed. Within the results, about 28 percent of survey participants expect that the index will close lower than where it was when the poll ended.
Experts showed wide division in their forecasts, with respondents forecasting the index to close as low as 1,950 and as high as 3,450. The median forecast showed the S&P 500 closing at 3,275 a year from now.
“When you look back at past market cycles, equity markets tend to bottom about four months before the economy,” says Michael Sheldon, CFA, chief investment officer and executive director at RDM Financial. “If you wait too long, all the good news will be priced in.”
What’s causing the modest forecasts? Experts say stocks are starting from a relatively healthy position, making it less likely for them to surge. In the prior quarter’s survey, experts expected stocks to rise by about 22 percent to 3,093.33 points, with every investing professional expecting gains. Markets already blew past those expectations.
Yet, fears of a second wave aren’t helping the picture, nor are worries that the virus hasn’t been contained. The 2020 elections are also approaching, causing unprecedented uncertainty.
“Among the biggest investor unknowns yet to be resolved are the economy’s performance and the search for effective COVID-19 treatments and vaccines,” says Mark Hamrick, Bankrate’s senior economic analyst. “Hanging in the balance is the performance of businesses of all kinds which helps drive stock prices. The fall election is also a source of uncertainty suggesting investors might want to stay buckled up.”
Expect lower stock market returns over next five years, experts say
Even when the coronavirus-induced recession ends, its devastating effects won’t be in the rearview mirror anytime soon.
Most experts (or 61 percent) say stock market returns over the next five years will be below their historic average. More than a quarter (28 percent) say returns should be about the same, while just 6 percent say results should be higher than normal. One respondent selected “uncertain or no answer.”
That represents a large shift from the prior survey, when no investing professional said stock returns would be lower than their historic average. Instead, 3 in 4 experts (or 75 percent) said stock returns over the next five years would be higher than normal, while 25 percent said results should be about the same.
“We are starting from relatively high valuations and will be in a slow growth environment due to large debt overhang,” says Bob Phillips, managing member of Spectrum Management Group. “That will compress the return from stocks.”
Market professionals divided on global, domestic stocks outlook, but prefer growth stocks
Bankrate’s survey suggests that investors might want to start looking at stocks outside of the U.S.
Experts were divided on whether domestic or global stocks would provide the best returns, though a growing number of experts were inclined to put more weight in the latter compared with prior surveys. About 2 in 5 (or 39 percent) say U.S. stocks will be the best, while another 39 percent preferred global stocks. Roughly 1 in 5 (or 22 percent) say returns will be about the same. That compares to the strong sentiment that professionals had toward U.S. stocks in the first quarter survey, with 4 of 5 respondents preferring that investment option.
The Fed’s interventions might be a reason for that divide. Some experts say the U.S. central bank’s whatever-it-takes policy is inflating asset prices, while others say it’s reducing risks associated with investing.
“The Federal Reserve will buy up the universe, so there is reduced risk in the markets, in my opinion,” says Ken Moraif, senior retirement planner at Retirement Planners of America.
But if you’re going to look toward any kind of stock for a valuable return, experts are in agreement that growth stocks will fare the best in the year ahead. About 7 of 10 (or 72 percent) of respondents say that option will be the best, compared with 11 percent who favored value stocks and another 11 percent saying results will be the same. One respondent didn’t provide an answer.
That’s all because growth stocks are expected to be the better option for weathering a low-rate, low-growth environment.
“The U-shaped economic recovery should favor companies that can grow earnings despite the macro backdrop,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. “Almost by definition, those are growth stocks.”
10-year Treasury yield should rebound, but still hold near record lows
But experts were unanimous about one aspect of timing the market: You’re not too late on locking in a lower mortgage rate.
The 10-year Treasury yield — which serves as a benchmark for the 30-year fixed mortgage rate — is likely to hold below 1 percent over the next 12 months, though rising slightly from where it closed on June 30: 0.65 percent.
The average of the forecasts is 0.86 percent, according to the survey, with 0.50 percent at the low end of the range and 1.25 percent at the high end.
That’s significantly below prior survey periods. The average forecast among experts in the first quarter of 2020 showed the benchmark rate reaching 1.39 percent by the end of Q1 2021, and in the fourth quarter of 2019, experts saw a much higher rate of 2.14 percent looking ahead to the end of 2020.
Why the drop in forecasts? It’s just because interest rate and growth expectations over the next few years have fallen, driven by the rise in unemployment and the Fed taking borrowing costs down to zero.
“It is going to take a number of years to get back to low unemployment and the same levels of GDP growth we saw over the past few years,” says Matt Nadeau, CFA, wealth advisor at Piershale Financial Group.
Bottom line
Even amid that uncertainty, experts were largely in agreement that a market rally is to be expected. It’s driven by two factors: An “in Fed, we trust” ideology, as well as a tunnel-vision view toward the light at the end.
“The stock market is looking past this tough time to better days ahead. In brief, it’s looking to 2021, and peeking into 2022 even, when it expects a COVID vaccine to be in circulation and the economy to be back to its pre-COVID self,” says Patrick O’Hare, chief market analyst at Briefing.com. “Until then, it is placing its confidence in the idea that the Fed’s policy support will see us through to the other side.”
But 2020 is far from over yet. Even with the presidential elections, the economy’s rebound and the path of the virus hanging in the balance, investors should remain focused on the long-term, steering away from trying to time the market while tuning out the short-term volatility and noise.
“To the extent that most Americans are exposed to the market for the sole purpose of saving for retirement, the lesson is to focus on the long-term and to avoid reacting on emotion,” Hamrick says. “Investors can extract some comfort from the powerful support being given to the markets from the Federal Reserve and other major central banks. We’ve now witnessed two financial crises over the past decade or so where the Fed seemed to make the difference in helping to put the stock market on firmer footing. The mantra seems to hold true for investors: Don’t fight the Fed.”
