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What happens next?
COVID-19, the markets, and your investments:
The pandemic accelerated certain market trends that were already underway prior to the outbreak—while sparking new ones.
If the economy recovers as we expect, we anticipate a convergence of investment trends that we did not observe after the 2008 – 2009 financial crisis. Massive liquidity and private spending, mixed with the broad impacts of a low (but rising) interest rate environment and ongoing market volatility, mean investors have a lot to consider.
Watch the video for more.
The new landscape: Investing in post-pandemic markets
Presenter: Veronica Willis, Investment Strategy Analyst, Wells Fargo Investment Institute
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May Lose Value
Empty office workspaces like these are just one of the signs COVID-19 has upended our daily lives.
Working from home, as well as trends such as teleconferencing, telemedicine, and contactless payments, likely will have broader economic implications for the labor market, consumer behavior, health care, education, travel, and real estate for years to come.
Our response to the pandemic has reshaped the economy and global markets — accelerating certain market trends that were in place prior to the outbreak — and sparking new ones.
Monetary and fiscal policies have also had an impact. These policies have injected an unprecedented amount of liquidity into the global economy, and we believe some of these policies will remain in place until late 2021 or even, possibly, into 2022.
This fiscal stimulus has allowed firms to borrow low-cost capital. This allows for major investments in innovations, such as cloud computing, artificial intelligence, and machine learning in order to improve operations, expand online customer service, and reconfigure global supply chains.
The combination of massive liquidity and private spending on big-ticket items is leading to a rotation in equity markets. There is a shift away from growth and high-quality stocks that historically have characterized late-cycle markets, into a typical early-cycle recovery led by small-cap stocks, cyclical equity sectors, and emerging markets.
Furthermore, in this lower interest rate environment, we believe bonds will continue to struggle. Yet, pent-up demand makes us favorable on commodity investments over the coming 6–12 months.
Despite the many pandemic-related changes in the economy, not all of the recent trends will be permanent ones. For example, we think working from home likely will evolve from its current form to a hybrid model.
To learn more about which trends we believe will be the most impactful and what investors should consider in an effort to take advantage of opportunities, download our special report: “The new landscape: Investing in post-pandemic markets.”
Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.
All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.
Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.
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This chart measures the difference in e-commerce spending by customers before the pandemic, during the pandemic, and following the pandemic. It compares customers whose monthly spending was less than 50% on e-commerce and more than 50% on e-commerce. Pre-pandemic spending was divided 76% brick and mortar, 24% e-commerce. During pandemic spending was divided 53% brick and mortar, 47% e-commerce. Post-pandemic spending was divided 54% brick and mortar, 46% e-commerce. It was measured by taking a survey of 8,604 participants through Capgemini’sVoice of Customer Survey.
Bond market returns continue to be tempered
During the pandemic, interest rates teetered near all-time lows, and many global bond yields marched further into negative territory. We believe global rates will remain low, but the U.S. may see a greater recovery in interest rates.
What does this mean?
Investors should not be tempted to diversify entirely away from bonds.
We believe the bond market’s diversification value will continue to make fixed-income assets an important part of a balanced investment portfolio.
Sources: Morningstar Direct and Wells Fargo Investment Institute, monthly flow data from January 1, 1993, to December 31, 2020. Flows include U.S. open-end funds, exchange-traded funds, and money markets, excluding funds of funds.
This chart shows the cumulative net assets flows for U.S. equities, U.S. fixed income, and U.S. money markets as a whole from 1993 to 2020. The chart highlights that investors have allocated heavily towards cash during recessions, but rotated into risk assets once a recovery was in sight.
Is a new commodities bull emerging?
In April 2020, oil prices went negative for the first time ever, likely signifying a washout event for commodity prices that could signal the start of a new commodities bull market.
The pandemic caused an unprecedented disruption to the global economy, a historic drop in commodity demand and a washout event in prices. This may have created the catalyst needed to spark a new commodity bull supercycle. Key to whether the bull finds its legs will be how supply responds.
What to know:
We currently favor commodities. Evidence is growing that the commodity run could extend well into the coming years
Have commodity prices reached an inflection point?
Recent strength in commodity prices could reflect a short-term bounce off the March 2020 bottom, or it could signal the beginning of a new commodity bull super-cycle.
Sources: Bloomberg, Prices by G.F. Warren and F.A. Pearson, Bureau of Labor Statistics, Bureau of Economic Research, and Wells Fargo Investment Institute. Monthly data from January 31, 1800 to December 31, 2020. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Please see the end of this report for index definitions and description of asset-class risks.
This highlights the performance of the commodity composite going back to the 1800s. The chart highlights periods where the commodity composite weathered bear super cycles, and how the recent bounce off the March 2020 bottom could signal the start of a new commodity bull super cycle.
Mergers and acquisitions continue to rebound
By mid-2020, global mergers and acquisitions activity had tumbled to its lowest level in more than a decade. However, merger and acquisition (M&A) activity has since recovered to pre-pandemic levels, while Special Purpose Acquisition Company (SPAC) initial public offering (IPO) issuance has surged.
In our view, the growing amount of optimism and deal-making suggests the trend will continue. The tremendous amount of debt issued during the pandemic will need to be deployed, with corporate deals a likely avenue.
What it means:
If M&A volume increases over the next year as we expect, both merger arbitrage and activist managers should benefit.
This chart shows the Global M&A volume on a monthly basis going back to December 2018 along with a two-year average. Beginning in September 2020, M&A activity returned to pre-pandemic levels, and the growing amount of deal-making suggest the trend could continue. Merger and acquisition volume in billions of dollars: Two-year average: 419. December 2018: 281; January 2019: 418; February 2019: 300; March 2019: 504; April 2019: 384; May 2019: 463; June 2019: 638; July 2019: 376; August 2019: 516; September 2019: 403; October 2019: 334; November 2019: 573; December 2019: 483; January 2020: 303; February 2020: 392; March 2020; 432; April 2020: 128; May 2020: 185; June 2020: 409; July 2020; 401; August 2020: 361; September 2020: 673; October 2020: 514; November 2020: 440; December 2020: 550.
Want to know more? Download the full report.
The full report from Wells Fargo Investment Institute offers more guidance for investing in an altered world, including:
• Implications for international investments
• How investors should position their portfolios
• Behavioral finance risks in a post-pandemic world