As we all settle into a new normal, we hope you and your loved ones are well. Isn’t that really what investing is about? It’s about storing up for the future to provide for ourselves and those we care for, or maybe a charitable cause or a personal dream. Uncertainty is high in the current environment, but we believe this, too, shall (eventually) pass.
So, while we may see more negative headlines in the coming weeks, we do not recommend clients try to time the markets. Staying disciplined to stick to your strategic asset allocation through ups and downs in the market has historically been the best way for investors to earn a positive return on their investment.
As the coronavirus spread from China in early January to the rest of the world, equity markets plunged, setting off the fastest bear market1 in history. Risk assets around the world fell along with interest rates. Spreads, the rate of interest of a risky bond over the treasury rate, quickly widened out, causing losses to bondholders of all but the safest government debt. The 10-year treasury closed at 1.92% on December 31, 2019, and ended the first quarter of this year at 0.70%.
Separately, Saudi Arabia and Russia started a price war in oil, causing crude to plummet. With shelter in place measures implemented across the world, demand also fell, causing a supply glut.
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Governments across the world stepped in to provide support through fiscal and monetary policy. China’s central bank, the PBoC, acted quickly to ease financial conditions. Central banks around the world rolled out measures to support the financial markets and ease conditions for borrowers. The Federal Reserve cut rates twice during the quarter, bringing the current fed funds rate range to 0.00% to 0.25%. Fiscal stimulus was rolled out around the world, with the United States rolling out a $2.4 trillion stimulus plan including support for the unemployed, small business owners, and individuals. The amount of domestic stimulus already approved for this crisis equates to about 11% of GDP.
Even with the unprecedented level of government support, economists are unanimous that we are heading into a recession2. This recession is expected to be very deep but also relatively short-lived. If you have heard the term, “U-shaped” recession and recovery, most economists expect a very deep drop in economic activity with everything shut down, and a period of low growth, followed by a surge in economic activity as we recover. We, of course, don’t know what the shape of economic output will look like for this period, but we do believe it will not be a “V-shaped” recovery. It will be a while until we have a vaccine, and, understandably, some segments of our population will want to wait for the “all-clear” to resume business as usual.
We expect to see depression era-like economic data in the coming weeks and months, with unemployment surging into the mid-teens and possible twenties. GDP is expected to decline by an annualized rate of 25% in the second quarter.
While the economic situation will no doubt get worse before it gets better, and we will likely need to see a widely distributed vaccine before we really get back to any kind of normality, the stock market recovered a lot of the loss from earlier in the quarter. Historically, markets have led the economy on the downside and the upside going into and coming out of recessions. In this case, investors seem to be discounting, at least for the moment, the impact on 2020 earnings and are looking toward the recovery in 2021.
While we are prepared to see truly terrible economic news in the months ahead, the market does not seem to currently be pricing this in. It’s impossible to know if it will come back to rattle markets, or if investors are more conditioned to stay invested after the two market sell offs and subsequent sharp rebounds in 2018. In any case, we expect volatility through this uncertainty with more dips and rallies, and we encourage you to ignore the noise. Take a look at your financial plan to see if you are still running according to plan, or if there are some smart things you can do. There has been a lot of new legislation passed in the last 90 days, so it’s good to take a fresh look at your plan in this environment. If you don’t have a plan, please reach out to your relationship manager to get started.
As always, we are here to support you during this time, and if you have questions or concerns or just want to talk to someone about what’s going on, we are available.