To say a lot has changed over the past 90 days would be an understatement. We began the year with a strong economic backdrop, robust employment, and what looked to be strong demand for housing heading into the Spring season. This helped fuel the stock market to new, all-time highs in February. Then the world changed.
Our lexicon is now filled with social distancing and curve flattening. The once strong economy now braces for a sharp and steep contraction. Second quarter economic growth is expected to be the weakest, post-World War II, with many economists expecting economic contraction at least in the mid to high teens. The unemployment rate will surpass its peak from the Great Recession of 2008. And, unlike past recessions, all of this is expected to occur in a matter of weeks and months, not quarters or years.
In March, financial market volatility returned with a vengeance. The velocity of financial market movement was unprecedented. The S&P 500 declined in excess of -30% in just 30 days. For comparison, in 2008 it took over 350 days for the S&P 500 to decline by a similar amount. When markets move that far, that quickly, it leaves little time for investors to prepare. This produces large moves that spare few asset classes, as summarized in the table below:
Fortunately, there were some silver linings that emerged that will play important roles over the coming months. First, the Federal Reserve acted quickly and decisively, seemingly applying all the lessons learned in 2008. Between March 3rd and March 31st, the Federal Reserve and other regulatory agencies issued over twenty new monetary response measures to ensure capital markets could continue to function. These included cutting interest rates to the zero lower bound, establishing a Money Market Mutual Fund Liquidity Facility, and purchasing various types of bonds. In our opinion, the Federal Reserve deserves credit for their response.
Secondly, policy makers in Washington acted somewhat quickly to pass policy for a fiscal response:
- March 6th: Coronavirus Preparedness and Response Act, targeting vaccines and research & development becomes law.
- March 18th: Families First Coronavirus Response Act, aimed at free testing, sick leave and unemployment insurance, passed into law
- March 27th: $2 trillion CARES Act signed into law
We believe the CARES Act, was much-needed legislation to ensure that individuals and small businesses could potentially weather the shutdown. Many people and business were put out of work, not because of poor choices, but rather because the country and global economy effectively shut down. Rightly, these people and businesses needed financial support- not only from a moral standpoint but also to prevent and potentially limit a larger economic crisis.
Lastly, we saw some much-needed stabilization in financial markets as the quarter ended. While we don’t necessarily believe we saw the end of volatility, it was comforting to see asset prices begin to display some support.
Investors that lived through the 2008 Financial Crisis, may recall the S&P 500 started 2009 with year-to-date losses in excess of -25%. The S&P 500 would go on to rally over +64% from its March 2009 low, ending the year with a gain of +23.5%. These gains were in anticipation of improvement in consumer consumption, peaking jobless claims and overall economic growth recovering in the second half of the year. But before we got there, the ride was bumpy; this ride could be bumpy too.
Like driving, investing is fraught with potential distractions. But the decisions we as drivers make determine how and when we reach our destination. Today, more than ever, we need to focus on that destination.
Looking ahead, for markets to move meaningfully higher, we will likely need to see improvement in virus data flow, indications economic activity is restarting and, possibly, another round of fiscal stimulus. The good news is that, like we saw in 2009, financial markets can recover faster than economic data improves.
Above all, a special thank you to all those frontline workers and their families who answer the call every day, providing the most essential services and patient care. We are truly grateful. To those who have fallen ill, get well; our thoughts are with you.
These are truly exceptional times, but U.S. markets and the economy have always recovered. We must allow our optimism to be greater than our doubts.
Be Well. Stay Healthy.
Disclosure: Marshall Financial Group, Inc (“Marshall Financial”) is an SEC-registered investment adviser with its principal place of business in Doylestown, Pennsylvania. This newsletter is limited to the dissemination of general information pertaining to Marshall Financial Group’s investment advisory services. Investing involves risk, including risk of loss.
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