Institutional Perspectives
Expert Perspectives on U.S. Equities
We asked Lord Abbett investment leaders for their views on how specific segments of the equity market are faring in the current environment.
Amid the ongoing market volatility, Lord Abbett investment professionals have stayed in close contact with advisors and investors to provide timely perspective on recent events and their impact on portfolios. As part of a series of articles surveying Lord Abbett experts for their views on recent market developments, here we present comments from our equity investment teams about the challenges—and potential opportunities—they are finding in the current environment. Edited versions of their comments follow.
Jeffrey Rabinowitz
Portfolio Manager, Durable Growth Equity
While there remains a high degree of uncertainty around the spread of the virus, and hence the depth and duration of its impact on the global economy, we believe that governments and health organizations around the world are responding with great urgency to contain this unfortunate situation. We believe that over the long term, the U.S. economy will return to a more normalized level of activity and people around the world will resume their typical daily activities. It is in this context that we are seeking to remain fully invested under our durable growth strategy and to identify dislocations that may be occurring. We believe durable franchises will persevere through challenging environments like we are seeing today.
We would characterize individual stock movements in the last few weeks as being largely affected by two factors. The first is leverage and the second is the impact from social distancing. Companies with high exposures to either of these two factors are likely to have seen their stocks decline the most. The impact from social distancing is a unique phenomenon that hasn’t been experienced in prior downturns and has likely never been attempted on this scale before. It has affected companies in unexpected ways ranging from the total closure of brick-and-mortar retail businesses and restaurants, to the cancellation of sporting events and other group activities, and even the pause in elective/non-emergent healthcare procedures.
Not surprisingly, the greatest weakness in the drawdown has been in industries/companies with the highest impact from social distancing or those with high leverage—travel-related companies would be a primary example. On the other hand, companies that help facilitate remote communications have performed better during this drawdown as have staples retailers and the dollar stores that provide essential food and other goods.
Given the challenge in predicting the nature of the virus, we haven’t made wholesale changes to the portfolio. But we have made some modest alterations adding to some of our strongest franchises and ensuring that we do not have too much exposure to the leverage and social distancing factors referenced above.
Tom O'Halloran
Partner & Portfolio Manager, Innovation Growth Equity
Matthew DeCicco
Portfolio Manager, Innovation Growth Equity
We are using this market correction as an opportunity to upgrade our micro cap and small cap portfolios with high quality names that have fallen into their market cap ranges (former mid caps for small cap and former small caps for micro cap). As for our innovation growth discipline, it’s worth noting that innovation stocks have demonstrated some defensive qualities during this downturn, particularly relative to cyclical sectors and traditional defensive sectors. We think that trend is notable as innovation itself has become the dominant theme in the markets today and will lead the way out as the economy recovers. In our opinion, you are either an innovator or vulnerable to its rapid pace of disruption.
We are monitoring economic factors, with much of the discussion centered around the duration of the economic slowdown and the businesses that are most likely to surprise to the downside if the duration of the slowdown is longer than expected or the companies likely to surprise to the upside if the duration of the economic slowdown is shorter than expected. Furthermore, we are considering the pace of the recovery after the period of social distancing has ended (or moderated).
As always, we are monitoring market technicals, which are an important input in our investment process. Based on recent market signals—the percent of stocks oversold, the elevated number of 90% down days,1 and the elevated put/call ratio, all indicate we are on the verge of pricing in Armageddon. This leads us to believe we are probing an approximate bottom, and a rally from these levels once it is sparked could be sizable. The current bear market could still take us lower and could endure longer, but we think the stock market’s bottoming process is likely closer to the end than the economy’s bottoming.
Finally, we continue to execute on our process methodically, in which we focus on innovative companies experiencing strong fundamental momentum that is reflected in strong price momentum. This is a time when our imagination, vision, and execution of our process is critical in our view. The value of having an experienced, crisis-hardened team is particularly important now. We believe the current Coronavirus crisis will pass as earlier episodes (such as the Cuban Missile Crisis, the September 11 terrorist attacks, and the U.S. debt downgrade) did. We think stocks have the potential to go up a lot from here.
Walter Prahl
Partner & Director
Darnell Azeez
Portfolio Manager, Dividend Strategies
Equity market volatility has been extraordinary, of course, with sizable losses virtually across the board. As is typically seen in episodes like this, we have observed quite significant and systematic variation in impact across different stocks. Value stocks have been hit particularly hard, reflecting their higher exposure to cyclical economic activity. The negative returns seen for these value-related characteristics come on top of the negative return for the market as a whole. Other factors have had notably positive returns that, conversely, have offset some of the overall negative return of the broader market. Notable among these are size and profitability—i.e., the stocks of large profitable firms have tended to outperform other stocks during this period. This “flight to quality” is again typical of sharp selloffs, though it’s notable that a degree of market stabilization was presaged several days ago by some reversal of these quality-related factors. Especially notable in that regard has been the partial reversal that has lately been seen in the strong outperformance of large stocks.
The sort of reliable dividend growth stocks that we emphasize tend to be profitable, high quality large capitalization names. While this category of stocks has not outperformed during every moment of the current selloff, over the period as a whole, these stocks have provided the relatively limited downside that we expect. As for the cyclical dividend stocks we hold, we expect them to potentially perform well once we begin to see greater visibility surrounding economic growth and cyclical stabilization.
In both of our dividend strategies, we have continued our natural cadence of portfolio management; we are actively analyzing portfolio risk, understanding the effects of the increased market volatility, and in some cases making sizing modifications based on our perceived alpha opportunities or risk mitigation needs. In light of the market volatility, we are vetting our highest conviction names with investment professionals across the firm. Importantly, we are utilizing the expertise of all of our fixed income professionals to assess the financial fundamentals of all our portfolio holdings as balance sheet strength in times of high stress becomes increasingly important. Also, as interest rates continue their dramatic decline globally, we strongly believe investors’ demand for yield will increasingly be met by dividend paying stocks.
1That is, trading days in which 90% or more of volume on a stock exchange is in declining stocks.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.
No investing strategy can overcome all market volatility or guarantee future results.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
A basis point is one one-hundredth of a percentage point.
Oversold is a term in technical analysis (see below) that refers to a condition where an asset has traded lower in price and has the potential for a price bounce at a future time.
Put/call ratio is an indicator used in technical analysis (see below) demonstrating investors' sentiment. The ratio represents a proportion between all the put options and all the call options purchased on any given day. The put/call ratio can be calculated for any individual stock, as well as for any index, or can be aggregated
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
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The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.