Social Distancing, Unemployment, Economic Stimulus... Oh my

The rampant spread of Covid-19 and a resulting health crisis not seen in 100 years quickly wreaked havoc on our modern economy during the 1st Quarter of 2020. When “social distancing” entered our collective vernacular, the immediate shutdown of non-essential business has resulted in a historic rise in unemployment, quickly unwinding employment gains from the last decade. On its heels has come an equally historic Federal Reserve economic stimulus package ranging from $2-$4T. The result was equity markets dropping 35% initially, only to be partially reversed almost as quickly. The markets have priced in a disaster scenario for 2nd quarter earnings, but remain optimistic for the 3rd quarter. But has the recovery been priced in too quickly?

The calm and smooth ride that characterized 2019 was quickly upended beginning on February 19th. The S&P 500 declined 30% in just 22 days. The table below shows just how historically quick the decline was.

And Bond Values
During the first portion of the stock market decline, measured from February 19th to March 9th, interest rates declined and bond values increased as most investors would anticipate. However, beginning on March 9th, bonds ceased being the effective counterbalance to stocks. This type of disruption was last seen during the financial crisis of 2008.

Where We Go From HereHistorical charts of the S&P 500 offer an illustration of the boom/bust lifecycle in the equity markets. While we do not have a crystal ball, after a 400% gain over the past 12 years, we were bound for volatility and it is clear that stocks price/earnings ratios have been repriced at seemingly better valuations. The question becomes, what will true earnings be in the face of the pandemic and when can we expect them to normalize?

Our concern is that equity markets have rebounded too quickly and earnings expectations are too optimistic, which could set the table for more downside volatility.

“New Normal,” “Stay The Course” And Other Colloquialisms
In listening to investment pundits and soothsayers, we are hearing the adages of bear-markets past, some of which imply we are passive bystanders along for the ride and somehow things have changed permanently. If the chart above tells us anything, it’s that the American economy is oftentimes unpredictable, but predictably resilient. As Covid-19 makes a recession feel almost unavoidable, we believe the engine of economic growth will prevail.

Stewardship
As advisors and fiduciaries, we are committed to providing unbiased guidance and leadership in all market conditions. Investing cannot mean the total avoidance of loss, but rather the mitigation of losses as we strive to achieve your long-term goals. Sometimes that means losing less is winning, as a hole dug too deep requires a larger recovery gain then what was originally lost.

While times are turbulent, we are afforded opportunities to be proactive and take advantage of more attractive equity valuations. We utilize downturns to provide tax efficiencies for the future and build positions with longer term goals in mind. Understanding each client’s personal objectives is the best indicator for managing risk; which is why we emphasize financial planning as the foundation for prudent decision making.

We are committed to proactively doing what we believe to be in your best interests. If your circumstances have changed such that you believe the positioning of your portfolio needs to be adjusted, please contact us as soon as possible. If we can answer questions or help in any way, do not hesitate to call or email us.