Quarterly Market Review and Outlook
2020 Q1 Financial Market Re-Cap
We expected volatility in the stock market to increase this year and mentioned this in our 1st Quarter Newsletter. What we didn’t expect coming into 2020 was that the coronavirus (COVID-19) would crush the Global economy and cast a huge shadow over the world’s financial markets.
In the U.S., the stock market got off to a good start and returned 4.5% through February 19th.[i] As more became known about COVID-19 and social distancing became a household word, the U.S. financial markets did not react well. From February 20th to March 27th, the S&P 500 declined 25%.[ii] At one point, the S&P 500 was down 35% from the highs set on February 19th. That was the fastest decline of 30% or more in U.S. stock market history![iii]
International stock markets fared no better. The international stock market (as measured by the ETF: ACWX) is also down 25% year to date.[iv]
Bonds were not perfect during this period of volatility. After initially holding their ground during the early days of the crisis, in early March bonds started to show signs of trouble. Indiscriminate selling caused a liquidity issue that lasted for several weeks and caused bond prices to go down. It seems like some order has been restored and last week was a good one for bonds.[v]
Gold, commodities, and anything else you can invest in also had a tough time this quarter. The only exception to that was cash—cash was king!
2020 Q2-Q4 Outlook
COVID-19 Economic Policy Actions
Let us first state the obvious—we are not disease or medical specialists. Thus, we feel it absolutely prudent to tread lightly on statements regarding the specifics of COVID-19. The only comment that we would offer is a word of caution on where you get your news on the virus. The mainstream and social media outlets are not, in our view, the best sources of information. We have found great information from the Centers for Disease Control (CDC), the SC Department of Health and Environmental Control (DHEC), and the Johns Hopkins Coronavirus Resource Center.
While there are many people rightly focused on the virus, we are focused on the economic and financial market ramifications of the governmental policy response to the crisis.
The Trump Administration and state Governors have made decisions in the name of public health and to offer guidance to lessen the medical impact of COVID-19. The trade-off is obviously substantial collateral damage to the economy, to the financial markets, to businesses large and small, and to families’ financial well-being. As a result, the Federal Reserve Board, the Trump Administration, and Congress have taken extraordinary measures to shore up and throw a lifeline to the U.S. economy.
In an unannounced meeting, The Federal Reserve made an interest rate cut on March 3rd.[vi] This initial rate cut only reduced rates by 50bps (0.50%) and did not have the immediately response that many would have hoped for as the stock market fell 3% later that day.[vii] On March 15th, in another unscheduled meeting, the Federal Reserve lowered rates effectively to 0%.[viii] Again, markets fell almost 5%.[ix] We think these rate cuts offer substantial medium and long term benefits, however, in the days after the cuts, many investors were spooked and they didn’t have the intended short-term effect.
Beyond rate cuts, the Fed is pulling out all the stops to include quantitative easing and providing liquidity to the bond and fixed income markets. Let’s just say that the Federal Reserve is firing all the bullets in their arsenal in trying to stabilize and support the economy.
The White House and Congress finally got on the same page and passed a $2 Trillion stimulus package on March 27th.[x] The scope of this package is unprecedented in U.S. history. Hopefully, it provides families, consumers and businesses some level of support to weather the COVID-19 storm. The specific timeline for implementation remains confusing. As is oftentimes the case, the implementation of this stimulus may take longer than expected.
The U.S. stock and bond markets rallied last week—why? We think the market, in part, is responding to the tremendous Fed and Government response. We think the financial markets had priced in the worst-case scenario about the virus itself. There has been a tremendous response to the virus from the Government and the medical and healthcare community. In our view, there is substantial room for optimism.
COVID-19 Financial Market Impact
The million-dollar question is when will the medical and health impact of COVID-19 level off, allow people to return to work, and permit the economy to return to functioning normally?
Unfortunately, the honest answer is no one knows with complete certainty.
We are hopeful that the optimistic scenario plays out in which the disruption from the virus levels at some point over the next couple of weeks to month and social-distancing guidelines are eased, shelter-in-place orders are lifted, and restaurants are reopened for a large part of the country. Should this occur, we’d suggest that the economic impact, while significant in the 2nd quarter, would be relatively short. The recovery in this scenario is short as well with the U.S. economy coming back to resume normal growth by 3rd to 4th quarter this year.
Of course, if the scenario plays out where none of the above happens nearly that quickly and large parts of the economy are still shut down in mid-summer to fall, we are in trouble.
The good news is the U.S. economy was very strong going into this crisis. The Atlanta Federal Reserve’s projections show Q1 U.S. GDP growth at 2.7% in late February.[xi] U.S. unemployment remained at historically record lows in late February.[xii] Additionally, wages continued to accelerate in line with recent trends.[xiii] Since the economy was strong going into the crisis, if the economic damage from the crisis can be contained, we are optimistic about a relatively speedy recovery.
We do not envy the incredible responsibility that our Nation’s leaders have to make decisions on this—to balance the medical implications with the economic reality of those decisions. What we do know is that our economy is based on people working, earning an income, and investing and spending that income. To get our economy back on the path to growth, we must get people back to work as soon as the health situation permits.
What Should You Do?
Ultimately, in our opinion, this is the right question that people should be asking relative to their investments and financial planning. It is at the center of conversations and advice that we want to engage with our clients. It is the only thing in which we have influence.
We would strongly advise against acting emotionally and with fear being the primary motivator. We don’t see any reason to panic. Every investor has been impacted. Virtually all our clients had cash as part of their allocation. That cash did its job in dampening the volatility. The financial markets have gone down in the past. They have always recovered. We have every reason to believe in the same outcome in this situation.
There has been some value restored to a previously fairly valued U.S. stock market. In other words, by many metrics, the U.S. stock market is cheaper today than it was just weeks ago. For investors with risk tolerance and cash, we think it could be a good time to consider adding to stock allocations. We would generally advise to wait a bit for the smoke to clear, but the time may come shortly where this makes a lot of sense. “Buy low” is an age-old tenant of investing that has worked for decades.
We would also suggest that now could be a great time to reassess your own unique risk tolerance, goals, investment objectives and financial objectives. We can obviously assist in that process.
We find ourselves reflecting on the many blessing in our lives. Our country, while not perfect, is simply the best in the history of the world. We enjoy unprecedented freedom and prosperity. God has uniquely blessed our country. Our prayer is that this experience will unite, not divide, us.
We all have friends, family, neighbors, and support networks—rely on them, check on them, and love them during this odd time in our history. If we stick together, we can all get through this.
Over the last six weeks, we have spent a great deal of time developing game plans for the best-and worst-case scenarios. We have evaluated client accounts. We have scrutinized the investment vehicles we are using. We have measured their performance and how they held up in this downturn. That is the task that clients have hired us to do and we are doing it to the best of our ability. For many years, we have adopted the long-standing Boy Scout motto, “Be Prepared”. We are following this situation very carefully—as conditions warrant, we will continue to implement prudent and appropriate actions. Finally, we are looking for opportunities.
We will continue to communicate during this time of crisis. We are open for business and available to talk by phone or to meet in person at any time.
Thank you for your continued trust and confidence. It is our absolute hope and prayer that you and your family remain healthy, safe and calm during this turmoil!
[iii] Sherman, Bill. “Sherman SITREP”. The Sherman Sheet. March 27, 2020.
Securities offered through First Heartland Capital ®, Inc., member FINRA/SIPC. Advisory Services offered through First Heartland ® Consultants, Inc. Walker, Higgins & Associates, LLC and Walker, Higgins & Associates Wealth Management, LLC are independent of First Heartland Capital ®, Inc. and First Heartland ® Consultants, Inc.