We closed out a historic quarter in the markets and our lives have been dramatically altered. Good riddance. It was the worst quarter for the S&P 500 Index since the financial crisis (2008-09) and the worst “first quarter” (Q1) ever, with stocks down -20%. Some other low lights from the quarter were: only one Dow stock was positive (Microsoft at 0.01%); it was the worst quarter for crude oil (down -66%) and the worst Q1 ever for the Dow in 124 years; and the VIX (measure of volatility and fear) soared more than 300% for the largest quarterly gain ever.
April is Here
This will be a very difficult month of data, with high levels of new unemployment claims, poor corporate earnings (for most) and economic recession. COVID-19 cases are rising, but so is testing and we don’t have to fully eradicate the Coronavirus to start growing again. Remember that equity markets are a leading indicator and often bottom well before fundamentals start improving. And sometimes while fundamentals are still getting worse too. This is a good chart of the 1970’s showing the S&P 500 Index vs Unemployment Rate as an example.
Unprecedented Times = Unprecedented Stimulus
The Federal Reserve (Fed) is “all in” –
The Fed has dusted off many parts of their 2008-09 financial crisis playbook, but they’ve also added in some new tools. Their actions to support what may be considered the safest part of the bond market, US Treasuries, may actually have more lasting implications for investor confidence and portfolios. During difficult times, we often expect stocks to decline but it is unusual to see Government Bonds, Corporate Bonds, Municipal Bonds and Mortgage Back Securities see such significant declines as there was a furious rush from large institutions to raise cash (see Bank Credit Lines accessed by Large Corporations).
It is logical to think that the incredibly bold moves from the Fed, including unlimited Treasuries purchases, will help keep yields down. But could yields actually rise from here after the Fed writes the bond market a blank check? History says yes, which seems counter-intuitive. For investors, it’s important to keep in mind that the combination of low starting yields and rising interest rates may lead to meager future fixed income returns. This is one reason why we rebalance portfolios and look for the opportunities, a “where the puck is headed” philosophy.
The $2 trillion CARES Act will help bridge consumers and businesses to the other side of what has become a self-inflicted economic and business crisis. With unemployment claims topping 10 million over the previous two weeks, this is a first step to soften the blow.
This human crisis is not over, unfortunately, but the bold moves from policymakers should help lessen the blow. Congress has already begun conversations on the next stimulus plan, which will not solve our health crisis but provide a big step to help limit the near-term downside.
As cases begin to peak and we get more clarity on the re-opening of the U.S. economy, we should see confidence grow. The economic data will surely get worse before it gets better, but visibility into the peak of this crisis is starting to come into view and markets—both stocks and bonds—may be beginning to sniff that out.
The Market will bottom as COVID-19 cases peak
Our stance has been that we don’t feel the market will bottom until the virus cases have peaked. This does not mean our base case is a lower low, but remember that market bottoming is a process not an event. Bear markets begin with an initial swoosh of panic selling, the low of March 24, often with a relief bounce higher and then continued fluctuations until the range of visible outcomes begin to narrow. Some good news is that the markets seem to have priced in some of the poor economic data, for example up days as unemployment claims of 10 million jobs lost over the past two weeks.
We are not yet advocating our clients to rush back into stocks, as you remain vulnerable to a deterioration of the news on the medical and economic front. The policy measures have helped but they’re not on their own enough for us to call a definitive bottom in the market yet. As we mentioned in our past commentary, this may not be “THE” time to buy, but it may be “A” time to buy and we are speaking with all of our clients to make decisions on your individual situation.