“April weather, rain and sunshine both together.” – An English proverb
The first quarter of 2020 was one we would like to forget. The coronavirus (also known as COVID-19) burst onto the scene and turned a health concern into a stock market and economic concern. Our country has been through difficult times before, and whether it was September 11th, 2001 or the financial crisis in 2008-2009, we have always been resilient and up to the challenge. While this challenge is different than the others, there is no reason to believe that the ultimate result won’t be the same.
What Will April Markets Bring?
The pattern of the markets in April will likely resemble the weather: some days will be rainy (declines), and other days will be sunny (rallies). While early April has experienced more sunshine (“up” markets), the key will be to remain balanced and not get too optimistic with good news, nor too pessimistic with bad news.
There are many unknowns with the virus and the economy right now. Questions many are asking include:
- When will COVID-19 be contained enough to resume our normal daily routine?
- When will the economy get re-started?
- How long will it take for the recovery to get us back to where we were pre-virus?
Given recent news concerning the slow-down in new cases and a possible peak in fatalities not far off, the first two questions seem somewhat easier to answer than the third one. An economy that has been halted for a couple of weeks is likely to come roaring back, but one that has been essentially closed for a couple of months will fight a much tougher uphill battle.
The economic numbers that come out in April and May will be very bad—numbers that would have been unimaginable even a few months ago. Unemployment will probably exceed 10% and may be substantially higher. GDP declines in the second quarter are projected to be more than 20% on an annualized basis. Company profits will drop precipitously, and consumer confidence may reach levels last seen in 2008. The markets were starting to anticipate this bad news way back in late February. Then, March turned even more sour before a late-month rally.
How Will Markets Recover?
Economists spend much time talking about the types of recoveries that follow economic downturns. A “V-shaped” recovery represents a sharp downturn and an equally sharp rebound, while a “U-shaped” recovery differs in that there is a longer period of time in which the economy “bottoms” before it finally turns up and leads to economic growth. Lastly, the dreaded “L-shaped” recovery is one in which the lower level of economic activity persists for many years.
Given the unprecedented responses from the Federal Reserve and the Treasury Department (with approval by Congress), there is no reason to believe that the stimulus won’t eventually do its job and produce the desired result of ultimately lower unemployment and a stronger economy. Since the economy can’t just be re-started with the flip of a switch, we are more likely to experience a “U-shaped” recovery, so it is important that expectations are realistic and not overly rosy or overly gloomy.
What Does This Mean for Investment Strategies?
While we would never try to predict what the next few months might be like, we have more confidence that market values could be higher in the medium term than the previous peak levels. Investors should have a time horizon that exceeds five years; therefore, we believe this is a time to stay allocated to the amount of equities that is appropriate for you and your risk tolerance.
They say that “April showers bring May flowers.” Given all the unknowns, the market’s “blooming” season may be a little bit delayed this year, but the recovery will take hold when it is least expected, and investors must be positioned for that event.
Our Investment Committee has been conducting daily conference calls since we began working remotely. Not only do we have internal discussions, but we leverage the relationships we have with advisory firm peers in the industry, as well as asset managers with whom we invest. This collaboration allows us to benefit from the sharing of ideas and the accessibility of deep resources in economic and market research.
We wish you a safe and healthy Spring, and we will continue to keep you posted on our thoughts as we move through the challenging months ahead.
Click here to read our Firm’s additional resources related to the economic impacts of COVID-19.