First and foremost, we hope you and your family are staying safe and healthy in this unprecedented environment that has included the spread of COVID-19, as well as a global economy that has essentially shut down to protect its citizens. It was only just last year that generated a moderately-growing economy, very low unemployment and strong investment markets, which led to 2020 kicking off with much optimism. This year was expected to be the continuation of the longest economic growth cycle in the history of our country, in addition to a bull market that began in March 2009 and showed no signs of slowing down. Then this trajectory took a different turn.
COVID-19 Rears Its Ugly Head
All that momentum changed in late January when our country was first introduced to the term “coronavirus.” While market volatility picked up slightly in January, it wasn’t until February 19th when extreme caution set in with investors, and the selling of equities began to take place. The downturn that ensued was swift and sharp. In fact, a 20% decline in the broad U.S. stock market indices occurred in the fewest number of trading days in the history of the markets. The selling, which some have speculated was amplified by computer trading algorithms, was relentless, and the next threshold reached was a 30% decline from the February peak. This further sell-off was also done in record time.
Markets are typically driven by greed or fear, and fear has been in control during the first quarter of this year. With the COVID-19 virus spreading and businesses shutting down to abide by the government’s call for social distancing, investors have been grappling with the fact that we are entering a period of significant uncertainty, and they have been asking questions like:
- How many jobs will be lost?
- How far will Gross Domestic Product (GDP) fall?
- How will corporate profits be impacted by the fact that over 100 million consumers are barely leaving the safety of their homes?
There are so many questions, but currently there are not many answers.
A Bold Response from the U.S. Government
Our view is that this downturn will ultimately be much different than the Great Financial Crisis (GFC) from 2008-2009. First, our financial system is much stronger today than it was 13 years ago for these primary reasons:
- Banks are well-capitalized and have been stress-tested frequently over the last decade.
- The psychological impact of declining home values, which was a large part of the prior recession, is not currently a factor.
- The monetary policy response from the Federal Reserve—lowering interest rates and buying assets—and the fiscal response from the Treasury Department and Congress—developing a plan to help companies, employees, states and healthcare institutions—have been substantial, and the implementation of these programs is already underway. The monetary response is providing the capital markets with the support and liquidity they need, and the fiscal response is giving the U.S. economy the stimulus that we expect will help sustain it during a period in which the country’s activity has come to a screeching halt.
Furthermore, while the latter part of March experienced a strong rebound, the next few months could deliver more negative trends. For example, the unemployment rate will spike; consumer confidence may continue to plummet; and GDP is likely to go way down for the first half of 2020, and maybe for the full year.
Historical Market Reactions Can Lend a More Positive Outlook in Emotional Times
However, despite all of the bad news and scary headlines, we believe that the markets have already incorporated some of this pessimism in the current valuations. While past results are not always indicative of future performance, we believe that historical market trends tell us that this current situation will get better because it always has. This situation should be a temporary one, and, while it is bad, it is not impossible to overcome. Jobs will come back, optimism will improve and the spirit of America will once again be on display. History tells us that recessions and bear markets do not usually last very long and that economic growth and bull markets usually do.
First Quarter Performance
For the quarter ending March 31, 2020, the global equity markets (as measured by the MSCI All-Country World Index) were down by 21.4%, while U.S. small cap and mid-cap stocks declined by 30.6% and 27.1%, respectively (as measured by Russell indices). The Barclays U.S. Aggregate Bond Index bucked the trend to generate a positive return of 3.1%, mainly driven by the flight to safety of U.S. Treasury securities; however, the corporate bond index (Barclays U.S. Corporate Bond) declined by 3.6%. As previously mentioned, things may get worse before they get better, but disciplined investors understand that in order to meet long-term goals, it is imperative to remain invested during the inevitable rebound, which usually takes place when it is least expected. As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” We will navigate this challenging environment together, and we will be stronger for going through it.
We will continue to monitor the effects of COVID-19 on the U.S. economy and the markets and will provide updates as needed.