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Asset Allocation: Throw Away The Playbook: 10 Surprises

The unique nature of the pandemic shock and the wide uncertainty surrounding it, meant there was no one historical playbook that fit easily. So inevitably there were going to be some surprises. In the event, there have been many.

  • Was that the briefest recession ever? Jobless claims suggest the recession ended and recovery began in late April.
  • In what is extremely unusual for a recession, personal income actually rose sharply (7.2%). Social income support policies more than offset declines in wages and salaries as employment fell.
  • Consumer confidence about future economic conditions not only held up remarkably well, it has been rising over the last 2 months. This suggests consumers expect the economic impacts will be short-lived and are less likely to alter their behavior.
  • Companies have largely also viewed the slowdown as likely to be short-lived. They have been planning for a recovery.
  • Credit crunch or explosion? Corporate bond issuance is running at twice the pace of prior peaks.
  • Credit not equities the bigger surprise. Credit spreads widened and tightened in lock step with equity prices. But this was despite: (1) a doubling in corporate bond issuance; and (2) credit indices weighting issuers by the amount of debt outstanding at a time when liquidity and leverage have been at the forefront of investor concerns.
  • In contrast to prior recessions, which saw a move out of cash begin around market bottoms, this time the cash mountain continued to grow, up by $1.2 trillion since early March, even as risk assets have rallied for 10 weeks now. A move out of cash should be a positive for growth and risk assets.
  • The global pandemic brought retail investors back into the equity market after being largely absent for a decade. They were important buyers of the correction in equities.
  • Institutional investor positioning in equities by contrast remains extremely low (10th percentile). Positioning tends to be correlated with macro data and represents an upside risk as growth picks up.
  • Visits to grocery and drug stores are back up to normal levels. Since these were not curtailed by lockdowns, this augurs well for a rebound in activity as lockdowns ease.
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