Market drives a technical PRISM recalibration Market drives a technical PRISM recalibration\images\insights\article\businessman-working-small.jpg March 27 2020 March 27 2020

Market drives a technical PRISM recalibration

Federated Hermes strategists remain overweight equities but make adjustments.
Published March 27 2020
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Bottom Line After plunging more than 35% from record highs over the past five weeks, the S&P 500 regained more than half of that deficit over the past three days through Thursday, surging 20%. That marks the S&P’s strongest three-day performance since 1931 and the first time stocks have risen on three consecutive days since Feb. 10-12.

Investors have been encouraged by legislative progress in Washington on the $2.2 trillion Phase Three economic stimulus bill. It passed the Senate on Wednesday and the House on Friday, and was scheduled to be signed into law by President Trump shortly thereafter. Additionally, the Federal Reserve’s aggressive monetary policy actions have been well received, and we are making solid progress with social policy initiatives.

The unprecedented speed and severity of the equity market downdraft has meaningfully impacted the asset class weights in our PRISM® asset allocation models. In response, we have recalibrated the allocations to better reflect where clients’ allocations likely are, assuming they have followed the PRISM recommendations to date. For example, the allocation to Domestic Large Cap Value fell from 17% to 16% of the overall model, as the Russell 1000 Value Index declined by 16.7% since Feb. 27. Overall, the 7% equity overweight in our moderate growth model portfolio we had in place at the end of February has been pushed by market action to a 4% equity overweight.

Our hope is that this recalibration will give us the ability to make more relevant and effective tactical recommendations. To be absolutely clear, this is not a change in view or recommendation. Despite the sharp rally over the past few days, we recommend clients hold the line on current positions, as we have consistently communicated over the past few weeks. We are not comfortable adding to equities right now, due to the uncertain outlook associated with the trajectory of the coronavirus and the hugely negative impact expected on the economy. Our recommendation reflects our view that we could potentially see a double-bottom retest in coming weeks.

That said, we are encouraged by response of equities Thursday morning following the initial weekly jobless claims report for last week. The number of claims soared to nearly 3.3 million, almost double the consensus estimate of 1.7 million, more than 10 times higher than last week’s reading of 282,000 and substantially above the previous all-time record high of 695,000 claims set in 1982. How did the equity market respond to this horrifically bad number? Stocks soared. While bottoming is a process, it’s typically good news when stocks rally on bad economic data, because it implies that the stock market has already begun to discount a worst-case scenario.

We will continue to share our best and most current thinking as it evolves over the coming days and weeks, as we navigate this unexpected global pandemic, the resulting worldwide shutdown of the economy and the eventual recovery.

Tags Coronavirus . Markets/Economy . Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Diversification and asset allocation do not assure a profit nor protect against loss.

PRISM® is a registered trademark of FII Holdings, Inc., a subsidiary of Federated Hermes, Inc.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Federated Advisory Services Company