THE TEST & THE ART OF THINKING, a high school pupil enrolled in a training class concentrates while choosing a clinic ‘Evaluation,’ 2018. Abramorama/courtesy Everett Collection
Everett Collection / Everett Collection
As the clock struck midnight on New Year’s Eve last December, many were excited about the possibility of living through a second “Roaring ’20s.” Together with the guarantee of wealth extending to the new decade, the future appeared golden.
Six months after, the entire world has been turned
upside down from the COVID-19 pandemic.
Heightened uncertainty has split Wall Street
strategists, with sparks doubting this sustainability of the climbing stock marketplace
and bulls pointing into over $3 trillion in market stimulation for a motive
investors shouldn’t attempt to “fight the Fed.”
We know the two arguments, but There’s actually just 1 question that long-term traders must inquire : “Do you think the U.S. economy will be in a better place in 12 to 18 months?”
Citi’s economists think the Reply to this
question is yes, which makes us convinced cyclical stocks such as banks, industrials
and small-caps will recover together with the market. However, the Path to this
recovery will have a number of obstacles on the way.
Reduced risk of a health care policy error Among the few positive consequences of 2020 was that the U.S. Congress overcame partisan politics to facilitate the financial pain for most Americans with a considerable increase to unemployment advantages.
These benefits may have disincentivized furloughed employees to reunite, but they’re at least partly accountable for the better-than-expected financial recovery thus far, which is very visible in retail sales and personal income reports. By way of instance, excluding food services, retail sales have been $15 billion (roughly 3.2%) greater in May than in February (pre-COVID lockdown), while personal income grew by $722 billion (roughly 3.8%). Both these metrics have been shocking awarded that the U.S. unemployment rate of 11.1%.
Read: Why did the excess $600 unemployment benefit stop individuals from job searching? All these Yale economists say that they finally have an answer
While Congress is debating additional stimulation measures, it appears probable that these improved benefits will be lowered.
Read: Republicans want to substitute additional $600 unemployment benefit with 70% replacement wages — here’s why that could take months to implement
While the extension of unemployment benefits could lead to lower levels of employment in the second half of this year as some workers choose to remain furloughed, aggregate demand for goods and services could fade along consumer confidence if sufficient offsets are not provided. We think this poses a near-term risk for consumer discretionary stocks as some consumers adjust to lower incomes.
Combined with the continuing struggles to contain COVID-19, we believe this may weaken the pace of the recovery and financial markets in the second half of this year. As such, Citi’s S&P 500
SPX,
+1.24%
target for year-end 2020 is below today’s levels at 2,900.
Investors who are most concerned about short-term
market risks may want to maintain some holdings in defensive technology
positions despite their already lofty valuations. Away from this crowded trade,
loose monetary policy, low real yields, rising inflation expectations and the weakening
U.S. dollar each make the case that gold should be considered for investors’
portfolios.
Read: Here’s the best way to hedge the weakening U.S. dollar and buying gold isn’t the move
In the long term, still a ‘Roaring ’20s’ redux? Beyond the near term, Citi remains positive. Advances in vaccines, telemedicine, videoconferencing and cloud computing have been forced upon the world at record speed in response to a pandemic that has claimed at least 500,000 human lives. Citi Private Bank’s Global Investment Committee continues to see long-term value in sectors and investment vehicles that will likely recover alongside the U.S. economy, including U.S. small- and midcap stocks, U.S. residential and commercial mortgage Real Estate Investment Trusts (REITs), Emerging Asia (including China), and Emerging Latin America (including Brazil).
On the fixed-income side, we favor intermediate-duration U.S. investment-grade corporate debt and U.S. inflation-linked debt.
Read: Here are 5 value-stock picks that set up your portfolio for a pandemic recovery
A global tragedy, this crisis may inadvertently cause a better, more productive work-life balance for many.
At the same time, COVID-19 shed light on the inequalities that remain entrenched from the United States. The companies at the forefront of meaningfully addressing these divisions may be the most attractive long-term investments yet, and Citi has optimism that companies that align their values to the United Nations’ Sustainable Development Goals (SDGs) will have a bright future ahead. Citi explores the problems and offers potential solutions in achieving these goals with its ongoing Sustainable and Responsible Investing Series.
Most think of the “Roaring ’20s” as a symbol of wealth and excess, but it was also a period of rapid social change. While the current decade has gotten off to a miserable start, perhaps there are lessons to be learned which will lead us to a period which lives up to promise of the Jazz Age.
Let’s not throw in the towel just yet.
Get the latest coronavirus news here.
Shawn Snyder is the head of
investment strategy to get Citi Personal Wealth Management. The
views expressed are those of precisely the author also do not necessarily reflect this
views of Citigroup or its affiliates.
