Read Time: 5 mins
Fundamental research can help identify risks and opportunities.
During times of financial stress, my mantra for investors is to keep a long‑term orientation and remain grounded in the fundamentals. That’s been difficult to do during the coronavirus pandemic as the short‑term dynamics are changing rapidly and there are so many unknowns. I still believe my philosophy is valid, but I would modify it to: Focus on what the fundamentals should look like on the other side of the crisis, and understand the costs to get there.
We are not facing a typical economic slowdown or risk‑off environment. We are in uncharted territory. Recession seems imminent (and is the consensus forecast), with Goldman Sachs economists currently predicting a 24% quarter‑to‑quarter annualized contraction in U.S. gross domestic product (GDP) in the second quarter. The worst quarter during the global financial crisis was an 8.4% decline.
Some observers are even discussing the potential for a depression. However, my view is that a depression (i.e., a prolonged downturn outside of the cadence of a normal business cycle, typically precipitated by policy errors) remains unlikely because of the likelihood of the finite life of the virus and the significant magnitude of the monetary and fiscal policy response.
The U.S. Federal Reserve has announced a sweeping set of programs to support credit markets, including unlimited purchases of Treasuries and mortgage‑backed securities and direct lending to corporations, small businesses, and municipalities hard hit by the crisis. The European Central Bank also is taking meaningful action, though belatedly, in my view. At this point, all of the world’s central banks seem to be responding to the crisis. The Fed’s action is a forceful response that should provide some much needed liquidity to the bond markets.
We believe the fiscal stimulus ultimately approved by the U.S. Congress and the Trump administration will be meaningfully larger than the stimulus package passed during the global financial crisis in 2008–2009 (about USD 800 billion). I think a bill is likely to pass relatively soon, but there no doubt will be some anxiety as it works its way through the political process. I would view it as a significant positive if the legislation provides targeted support for travel‑related and other directly impacted industries, including airlines, lodging, cruise lines, and restaurants, among others.
More relief may be in order if the crisis goes on beyond the next few months. However, the current aid package would constitute a significant fiscal boost.
For context, U.S. GDP was USD 21.4 trillion in 2019, and the government budget deficit was about USD 1.6 trillion. Estimates suggest that the industries that are being shut down by the crisis make up at least 10% of U.S. GDP.
The main question everyone is asking now is how long we will be required to implement meaningful social distancing and keep entire industries shut down in order to flatten the curve of viral infections and ensure that our health care system can adequately care for those that do contract COVID‑19, the disease caused by the coronavirus. Scott Gottlieb, former commissioner of the U.S. Food and Drug Administration, has estimated that cases will grow into late April and that we won’t see a real break in transmission until well into the summer of 2020.
It is clear that the data on the coronavirus pandemic are going to get worse in the near term. The number of confirmed cases will grow very rapidly as we test more individuals, and the number of reported deaths will escalate. Many more jurisdictions will implement strict “shelter in place” rules. Unemployment claims will spike (tens of millions of people work in industries that are directly impacted by the pandemic), economic statistics will crater, and companies will retract earnings guidance and suspend dividends.
However, while we are acutely cognizant of these short‑term risks, I and other senior investment leaders and portfolio managers at T. Rowe Price firmly believe that, in time, the crisis conditions will ease and the markets will recover. That being the case, we already are starting to focus on the longer‑term outlook:
In our view, there is a potential upside scenario where we come out of a bear market by the summer of 2020 as pent‑up demand and stimulus drive a rapid acceleration in economic activity and earnings growth. In this scenario, the earnings growth rate in the fourth quarter could bring S&P 500 earnings per share up to USD 160 on an annualized basis, potentially pushing the index back above 2,700. Having said that, we are obviously dealing with a very broad range of outcomes.
My own base case is that the market may bottom no later than when the number of reported coronavirus cases peaks and we get more clarity on the fiscal package. I believe both conditions could be met in the next four to six weeks. However, regardless of whichever scenario unfolds, I would offer the following points:
Finally, we believe investors should think now about how economic and market behavior might be altered once we move beyond the worst of the crisis. We believe economic conditions will improve and
the health crisis will recede. We will return to some normalcy, but things won’t be exactly the same. The pandemic will certainly affect the calculus of the U.S. elections, for example. Certain companies
and industries will be fundamentally altered.
For investors with a long‑term orientation, this isn’t the time to let a psychology of fear dominate their decision‑making. We’ve faced challenging markets in the past and, in time, moved beyond them. We think this will be true again this time.
By grounding their decisions in fundamental research and thoughtful analysis, we believe investors can best position themselves to manage risk in the short term and to take advantage
of attractive potential opportunities once we emerge from the immediate crisis.
Sign up for US Equity insights from T. Rowe Price
Share this article:
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any
jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’
accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks
or registered trademarks of T. Rowe Price Group, Inc.
You might be interested in…
Read Time: 5 mins
Read Time: 7 mins
Read Time: 6 mins
Read Time: 7 mins
See our comprehensive range of US equity funds
This site is intended for financial intermediaries in the United Kingdom. I have read the terms detailed below and confirm that I am a financial intermediary and that I wish to proceed. By accessing this website, you consent to T. Rowe Price collecting information by way of cookies.
Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.
Information obtained from this site is intended specifically for the individuals who have agreed to these Terms and Conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.
The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:
(a) A government;
(b) A bank or insurance company;
(c) A pension fund or charity;
(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;
(e) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing;
(f) Representatives of the media for corporate and background information about T. Rowe Price.
Persons who do not fall into one of the above categories should not act upon the information contained herein.
Certain persons may have access to information regarding the T. Rowe Price Funds SICAV, an investment company incorporated as “Société d’Investissement à Capital Variable” (‘SICAV’) under the laws of Luxembourg and the T. Rowe Price Funds OEIC, an open-ended investment company (‘OEIC’) incorporated in England and Wales. The sub-funds referred to on the site are only offered by the current prospectus. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.
Past performance is not a guide to future performance. The value of securities and any income generated from them might decrease as well as increase. Changes in rates of exchange may also have an adverse effect on the value, price or income of securities. Investors should also be aware of the additional risks associated with investments in emerging markets, high yield securities and smaller companies.
This information herein does not constitute investment advice and the products described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision.
Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ, which is authorised and regulated by the U.K. Financial Conduct Authority with the reference number 194667.