First, and most importantly, we hope our latest market recap finds you and your families in good health and in good spirits in these uncertain times.
In the span of a few short months, the global economy fell into a deep recession of uncertain depth and duration. News headlines are universally dominated by the COVID-19 pandemic, its current effect on the health of our society, and its evolving impact on the global economy. The US has taken the lead with an unprecedented set of monetary and fiscal stimulus measures, closely followed by similar measures from other major countries. Many market participants have spent hours debating the “shape” of the eventual recovery, whether it is “V”, “U”, “L” or some combination of the three. While the shape of the recovery will matter in time, what matters most now is that governments continue to address the immediate economic impact caused by the shuttering of many areas of the global economy.
A sharp economic recovery is currently priced into the US stock market. In March the S&P500 fell 34% into a bear market on fears of a second depression and peak levels of uncertainty related to the virus. The index has since rallied 25% over the past few weeks on investor optimism, on improved viral statistics and on the monetary and fiscal policy actions mentioned above. The volatility and price declines were also significant in many areas of the fixed income markets, with High Yield and Investment Grade credit both declining to levels not seen since the financial crisis as a result of concerns over market liquidity. The passage of the CARES Act and the Federal Reserve effectively backstopping both equity and fixed income markets have combined to calm both respective markets for the time being. The Fed and Treasury have together unleashed virtually every available facility and program created during the financial crisis, even expanding some to allow for further market support. Market commentators have termed these programs the current “Alphabet Soup” of the Fed.
As of this writing in late April, all of these actions leave equity markets just over 13% below the all-time highs reached seven weeks ago. We moved defensively early prior to, and at the onset of, COVID-19. Given the recent rally from the lows of mid-March in both equity and fixed income, we have taken opportunities to reduce risk and rotate into safer asset classes where possible for clients in the event of another wave down in risk assets. We believe there is further uncertainty and volatility ahead as the social distancing measures and their economic impact continue to ripple throughout the global economy. Many experienced market participants, portfolio managers, and economists have called this the most difficult period of their careers. This is likely not an overstatement.
Looking to the weeks and months ahead, it is important to explore possible trajectories in both the medical and economic data. The medical data is continuing to evolve rapidly, with Europe appearing to progress beyond peak fatalities and Asia dealing with a small resurgence in cases as they attempt to re-open their economies. The US is fighting multiple hotspots simultaneously and it is too early to know how far along the curve we are as a nation. Uncertainty is the enemy of business planning and financial markets. As such, until Europe and the US have progressed further on the path towards declining case numbers and fatalities, it will be extremely difficult to estimate when it will be safe for governments to help facilitate safely re-opening their economies.
The economic data is also evolving rapidly, with some of the weakest measurements on record for several key areas of the US and European economies. We have seen record numbers of people apply for unemployment benefits, enough to completely erase all the jobs created since the Great Financial Crisis of ’08-‘09. This will likely result in the highest unemployment rates since the Great Depression. Additionally, we are likely to see the lowest GDP growth on record for the next one to three quarters depending on when the economy can actually re-open. Many corporations have withdrawn their earnings guidance for the year and commodities, including oil, have continued to find new (or even negative) lows. All of the economic data, both soft (sentiment/survey based) and hard (based on real-time economic activity measures) is pointing toward a recession which the IMF has already dubbed the “Great Lockdown”.
We believe this continues to be a time for caution and data driven decisions, because no one truly knows how the next few months will unfold. We remain vigilant in managing our clients' portfolios. Please don’t hesitate to contact a member of our team with questions or to find out more about what we are doing for clients.