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Morningstar Sees Rocky Year Ahead, but No Major Recession

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Market volatility will continue throughout 2020, but Morningstar analysts don’t expect a 2008-style recession to happen in the U.S. as a result of the coronavirus and expects an economic recovery to start in 2021, they said Tuesday during a webinar called “Navigating Investing during Novel Coronavirus.”

“The current crisis has obviously created upheaval for all of us on a personal level,” as well as the economy and the markets, moderator Christine Benz, director of personal finance at Morningstar, said at the start of the webinar. “Many of you are navigating these extremely volatile market conditions for client portfolios and it’s no doubt stressful.”

One especially concerning element of the current crisis is that “events have been unfolding very quickly,” according to Jeff Wagner, portfolio specialist with Morningstar Investment Services.

Going into February, the U.S. market was entering the 11th year of a bull market, the longest ever, and U.S. large-cap growth companies were doing especially well, he noted. “Consumer sentiment was particularly high, but that also made the market a little bit more sensitive and a little bit more vulnerable to a shock such as the one we’re experiencing right now,” he pointed out.

Morningstar’s portfolios were “positioned rather defensively relative to their targets” entering February, he said.

However, the coronavirus “has been a surprise” and is a “hard-to-quantify risk that’s injected a lot of uncertainty into the marketplace,” he noted. And it also comes at a point when the global economy has become “more connected than ever in terms of travel and in terms of global supply chains,” he said.

Despite the fact that experts claim market corrections are “healthy,” market “volatility can be very unsettling for both end investors and the professionals who serve them,” he conceded.

Investors tend to want to take some action as a result of such volatility, but research shows that “tends to do more harm than good” to portfolios, he told listeners. History has shown that “now is not the time to make any big moves in your portfolio — it’s better to stay the course and stick to your long-term goals,” he said.

Wagner pointed to six different crises in the past — including 9/11 and the 2008 downturn — in which markets bounced back once those events were over after short-term losses for one or more months. “The key takeaway here is that staying invested is generally a good bet,” he said, but warned there was no way to tell what will happen as a result of the coronavirus crisis.

“Over the near term, we do see continued volatility [because] there’s lots of uncertainty in the market right now,” he said. However, he predicted the market will return to its normal fundamentals, although he said he didn’t know exactly how long it will take.

Russel Kinnel, director of manager research, went on to note that diversification is the best tool in turbulent markets. “Tech has held up relatively well,” he said, adding “large growth is doing very well.”

Showing a chart of returns through March 16 for the top fund categories, he noted just how much of a hit many of them have taken. As a result of the “severe” selloff, “the average investor is really hurting” now, he said. However, he noted that the Intermediate Core Fund held up relatively well, declining 2.7% in the most recent week (less than any other fund on the chart) and grew 2.6% year to date (the only fund that grew at all in that period).

Although Morningstar expects U.S. GDP to take a hit from the current crisis, Karen Andersen, an equity analyst at the firm, predicted the GDP hit will be in line with that of the “moderate” 1957 Asian flu pandemic rather than the severe hit from other prior health crises. And “we think the economic recovery will begin next year,” she predicted.

Like health experts, she projected that the current social distancing that is being practiced by Americans will help keep deaths down. She noted employees at Chicago-based Morningstar are mostly working from home at this point, just like those at many other companies across the U.S.

Morningstar expects “minimal long-term GDP impact,” according to Preston Caldwell, another equity analyst at the firm. The company also doesn’t expect a 2008-style recession to develop as a result of the coronavirus, he said.

During the Q&A, Wagner noted that “stocks are on sale right now” compared to what they were just a month ago, so “if you have an appetite for risk in this market, it wouldn’t necessarily be a bad idea” to deploy some capital to take advantage of that low pricing.

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