Multi-Asset Strategies Outlook

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Pandemic Alphabet Soup: When V, U and L Spell “IDK”

We’re amid the deepest recession since the Great Depression. The U.S. economy contracted at a 5% annual rate in the first quarter of 2020. Estimates for the second quarter are even more dire. Unemployment is at levels we haven’t seen since before World War II. Corporate profits are down. And it’s not just the U.S.—the International Monetary Fund expects global economic growth of -3% in 2020, the worst since the Great Depression.

Of course, we know the cause—the pandemic and steps taken to combat it. But what’s less clear is the cure, both for the disease and the economy. Economists speculate about the shape of the recovery—a quick V-shaped rebound, a more prolonged U-shaped recovery, or an extended L-shaped downturn. The stock market has already voted—the sharp recovery suggests equity investors are betting on the “V” scenario. But the bond market appears to be positioned for something more akin to the “U” or “L” scenarios. What we want to emphasize, however, is that the pace of the recovery is largely dependent on progression of the disease. What’s more, accurately predicting financial market returns in the short run is challenging in the best of times and particularly difficult under current conditions.

The “good” news is that recent volatility has created opportunities in financial markets worldwide. And to be sure, we are firm believers in active portfolio management’s ability to produce the desired outcomes for shareholders. What’s more, research indicates active strategies have historically performed best precisely when market volatility surges. Certainly, the ability to differentiate among individual stocks, industries and sectors is a hallmark of active management. This is particularly important in multi-asset portfolios, where decisions about risk management and asset allocation over time explain the lion’s share of a portfolio’s performance.  

Asset Class

The biggest change in our model is an increasingly negative view of bonds. With interest rates so low by historical standards, bonds are less attractive relative to other asset classes. Stabilizing stock and commodity prices also reduce the perceived safe-haven appeal of bonds. Nevertheless, after stocks’ recent rally, it’s hard to argue for an overweight given the poor outlook for earnings and the economy.  

Equity Region

We continue to favor U.S. over non-U.S. equities but have cut our overweight in half. Stock momentum remains firmly in favor of U.S. equities, but many other fundamental and financial indicators have moderated or even favor non-U.S. stocks. Of course, the economic data have only begun to reflect the effects of the pandemic and measures taken to limit its spread. We will continue to monitor these developments closely. 

Economic data are all over the map because of effects of the virus and efforts to combat it. Our data and valuations favor EM equities, while momentum clearly favors the U.S. Given that split, we’re neutral while we work to discern a clearer and more stable trend. 

U.S. Equity Size & Style

We returned to neutral after a period favoring small-cap stocks. The impetus for the change was largely a result of the sharp increase in the P/E ratio for small stocks, meaning they became much more expensive. P/E ratios for large-cap stocks have also increased in the wake of the economic downturn, but by a much smaller margin. 

Amid the economic turmoil, growth stocks’ appeal increased relative to value. Both our measures of market sentiment and the models’ economic components tilted in favor of growth.  

Fixed Income

Fed support and high average credit quality make U.S. securitized bonds attractive. We remain cautious on U.S. corporate-backed securities given questions about volatility and valuations; nevertheless, we prefer U.S. credit to European credit. Poor growth and yields make these bonds less appealing. 


Real estate investment trusts (REITs) are very attractive relative to bonds amid Fed rate cuts and record-low cash and Treasury yields. REITs also offer compelling valuations after a stretch of underperformance, while their yields compare well with the dividend yield available on equities.  

Q3 2020 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Past performance is no guarantee of future results. Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds. 

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

This information is for educational purposes only and is not intended as investment or tax advice.

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