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.