To state the obvious, a lot has changed in the first quarter of 2020. The world is struggling to contain the COVID-19 virus, which is straining health care systems in many cities in our country and around the globe. In order to “flatten the curve,” we are following new “social distancing” guidelines. During this public health emergency, our lives have been interrupted, but as a society we’re focusing our efforts on stopping the spread of the virus and expressing our gratitude and admiration for the hard work and dedication of health care professionals around the world.
Needless to say, COVID-19 has caused unprecedented disruption in the global economy and financial markets, and the virus’s impact continues to escalate. The economic statistics that will be announced in the coming weeks and months will be more negative than anyone could have imagined when 2020 began. We have already seen jobless claims in the US at 10 times the prior record highs set during the 2008 financial crisis. In the first half of 2020, and especially for the upcoming second quarter, the US and global economies will experience the worst contractions since the Great Depression.
If we know a deep recession has started and we still don’t fully understand when and how the economy will recover from the Coronavirus pandemic, is it prudent to maintain the same long-term investment strategy? History shows that we have overcome all prior crises, but the methods and timelines of each recovery have varied. Maybe the stock market bottomed on March 23rd, but we expect those recent lows will be tested again and we may drop to even lower levels. Most experts say it is impossible to profitably time the market on any consistent basis. We agree and that’s why we advise our clients to maintain their diversified investment portfolios.
Thinking back to January, the US stock market was still rising during the longest bull market in history and US economic growth was running at a comfortable 2% annual rate. The S&P 500 Index reached an all-time high on February 19 but by March 23 its value had dropped by 34%. Some analysts have called this the “fastest bear market in history.” The uncertainty about the Coronavirus caused a loss of confidence in financial markets that just weeks earlier appeared to be in a stable state of equilibrium. The lack of confidence spread to the bond market and some credit facilities dried up as no one was willing to buy certain bonds at the prevailing prices sellers valued their assets.
While the quick drop in stock prices and economic growth has been unique, the dysfunction in the bond markets was similar to 2008-2009. The US Federal Reserve Bank had developed a set of tools during the previous recession and the Fed acted quickly to re-implement some of those programs. Bond markets have started to recover in response to massive support from our central bank. That’s good, but in the long run we need a stable economy to support the bond markets.
Economic recovery will be more challenging, but our government leaders appear ready to do their part. In remarkably quick fashion, Congress has already agreed to 3 bills designed to support our citizens during this crisis. On March 27, President Trump signed the bipartisan CARES Act, which will provide up to $2,300,000,000,000 (that’s trillion) of relief to American workers and businesses. It’s been called a stimulus package, but it’s really a few targeted programs designed to help workers and small businesses hold on until the pandemic ends. It also provides significant financial support to state governments, our health care system and targeted industries most impacted by the crisis. Its effectiveness is yet to be seen, but implementing plans to spend 10% of GDP in one bill shows that our politicians are taking the virus seriously.
Before the COVID-19 virus interrupted our lives, most sectors of the US economy were in pretty good shape. Consumer confidence was high due to ample employment opportunities, low interest rates and record high asset values. Balance sheets at major US Banks were strong due to higher reserve requirements. Corporate earnings were projected to grow about 10% in 2020.
All of a sudden, discretionary consumer spending stopped – no travel, not even to work; no restaurants; no sports; no culture; no conferences. All eyes are on the spread of COVID-19 and our capabilities to control the health care crisis. We still don’t know how long this crisis will last, but with increased testing, existing drugs that provide some relief and an eventual vaccine, we will conquer this virus, as all prior viruses have been solved.
When “stay at home” orders are loosened, we will emerge into a changed world. But we will emerge with pent-up demand for social interaction and desires to celebrate missed weddings, graduations and other milestones. The economy will be transformed in response to our common experiences with this pandemic, but a feeling of prosperity will return.
There will be lasting damage from the Coronavirus. Government debt will be higher, but low interest rates will make debt payments less burdensome. Americans will be slow to return to our pre-virus lifestyles, but maybe by July 4th we will be celebrating with family reunions and fireworks. We will likely experience a second wave of COVID-19 infections, but by then we will better understand how to contain the virus and have better medication to help the infected.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions. The S&P 500 is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
©2020 Canby Financial Advisors