It would’ve been hard to imagine at the end of 2019 how much the world could change in just three months’ time. We entered this year with near-full employment, a goldilocks economy (not too hot, not too cold), low interest rates, low inflation and equity markets near record levels.
Today, we are mired in a bear market, almost certainly in a recession (though that won’t become official for months), facing a near shutdown of the economy, and staggering numbers of newly unemployed. The declines in your account balances this quarter, as shown on your enclosed reports, are steep (albeit well off the lows). Volatility has been so extreme that several of the biggest single-day moves for U.S. stocks, ever, in both directions, occurred within a two-week period. The decline from record highs to a “bear market” (i.e., down at least 20% from the peak) was the fastest ever. The 3-day, 17.5% rise in the S&P 500 from the recent lows, was equally historic. It’s been a month or so full of superlatives.
Of course, we all know what the culprit is – a novel coronavirus now officially known as COVID-19. A devastating pandemic and a true “Black Swan” event. The sort of thing that can lay waste to an economy that Goldman Sachs had recently referred to as “recession-proof.” The sort of thing that gives new meaning to “uncertainty.”
We believe, in due course, the pandemic will peak and the stock markets will trough. And by the time the data confirms the recession we are most certainly in the midst of, we’ll already be on the road to recovery. The stimulus that the government has put in place won’t have an immediate impact, due to the forced nature of the economic shutdown, but it will lay the foundation for extremely favorable conditions for rapid recovery when the situation turns.
We don’t know how much further equity markets might decline, how deep the recession might be, how many will be unemployed, nor, most importantly, how steep the toll on humanity will be. On the other hand, we do think we can make some reasonable assumptions about the duration. The upside, as we see it, is that the worst of this crisis will be relatively short. Most models show the curve peaking over the next 2-4 weeks, and that’s without the benefit of any positive developments in terms of treatment or vaccine. A breakthrough of that sort would obviously be a significant additional positive. Either way, we think it’s highly likely we’ll see meaningful signs of recovery in the economy and the market later this year.
We are digesting all the information we can to help us provide you with the most well-informed investment counsel we can during these trying, uncertain, and volatile times. Continue to expect frequent updates by email, which are also posted to our website, and please reach out to your advisor with any questions or concerns.