2020 First Quarter (Q1) Market Commentary
Most economic slowdowns occur over time with a slow deterioration of Employment, Consumer Confidence, and Gross Domestic Product (GDP). Companies generally tighten their belts and the Fed and Government make monetary and fiscal policy changes to help soften the blow and eventually we come back slowly. It’s called the business cycle. We have been going through these motions for decades.
Almost all economists would agree that we are currently in a recession, driven by something that we have never seen. It was the ultimate black swan event, the COVID-19 Coronavirus, which originated in China and has spread like wildfire across many parts of the world. It essentially turned off the economy overnight in a way that we have never seen.
Economic Impact
As we write this letter on March 31st, 2020, most businesses across the US are closed “temporarily” or at least working from home. This will result in a skyrocketing of the unemployment rate when it is reported in early April and likely more unemployment into May. We will also likely see a cratering in consumer confidence and a drop in GDP like we have never seen before. Of course, the stock market led the way as it normally does and we saw relentless selling pressure from late February into mid-March. This all occurred well in advance of the skyrocketing coronavirus cases that we have seen in the last week or so. It came well in advance of the mandatory closing of businesses and the “Stay at Home” orders we have seen in the last few days. In a nutshell, the market priced in the worst of this very quickly and well in advance. From peak to trough, we saw the stock market drop by about 34% (S&P 500 Index) and as we closed the quarter, the S&P 500 lost 20.0% while the Dow was down 23.2% and the NASDAQ was lower by 14.2%.
COVID-19 Stimulus
As mentioned above, the market is generally a forward-looking indicator. While not always correct, the market tends to move ahead of the bad or good news to come. In this situation, it was no different. Early on, before this was a pandemic, the market priced in a significant slowdown in our economy. The Federal Reserve quickly enacted several rounds of quantitative easing and market supporting moves and then we also got the biggest government stimulus bill in history. These events helped stop the market drop and we saw a massive rally to the upside beginning on March 24th. That move essentially broke the downside pressure and provided a great deal of relief to the market.
The moves by the government bought the economy time. The moves were designed to help individuals pay the bills while out of work and help small businesses keep their employees while their business slows. Now we need to figure out a way to get back to work.
There is Good News
As we write this letter, the news is very fluid. While we will continue to get more bad news on the rising death toll and new cases, we are also seeing some “green shoots” in the way of faster testing, promising therapies, and early-stage vaccines. This has been encouraging for the market as it tries to figure out how “temporary” this event will be. Many economists believe that unlike other recessions, this recovery can be swift and powerful.
As we move forward, the market is likely to be very volatile. The good news is that expectations are low and that the government continues to indicate it will do whatever is necessary. Eventually, however, we will need to see significant progress in this fight before we can all get back to work and back to normal. We are all hopeful to see that progress play out in the next few weeks and we are hopeful that our medical professionals can find additional therapies and perhaps a vaccine or a cure.
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