Please note: This update was prepared on Friday, March 20, 2020, before the market’s close.
Make no mistake, we are living through a historic moment. A pandemic is upon us. But we are not panicked. Instead, we are focused on safeguarding your assets while slowly and safely scouting for the long-term opportunities this crisis is creating.
Fear is a rational response to what’s happening. Images of empty restaurants and airports, along with shelves stripped bare of toilet paper and canned beans, are the media’s way of ensuring your eyeballs are tuned to their particular news feed. We think such images increase the fear that everything we know will change forever. Parts of life absolutely will. But, most certainly, not all of it will, and a new normal will emerge, taking away much of the uncertainty that has been so difficult to bear these last few weeks.
Yes, the human, economic and market toll cannot be understated or downplayed. We are not doing so. Instead, as is our job, we are researching and analyzing worst-case scenarios that could prolong and deepen the problematic period we are working full-tilt to manage through.
We are unwavering in our disciplined dedication to you and your family. And our family here at Adviser Investments will be with you every step of the way through this crisis.
Remember, our strategies are designed to react to changing market trends—and as we mentioned last week, they have been actively trading this month. The goal is for our defensive portfolio options to mitigate losses, while our offensive portfolio options are there to capitalize when this broad market selloff reverses—which it will. We can’t say when that will happen, but we do know that it will happen.
For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index have fallen 29.2% and 25.1%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 31.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has risen to 2.31% from 1.80% last week, returning to the same yield it had at 2019’s end. On a total return basis, the U.S. bond market has declined 0.6% for the year.
Market History Tells Us to Keep Calm
We won’t sugarcoat it: Downside volatility has gone off the charts. In just 19 trading days, we’ve gone from a market peak to a bear market. This week saw two of the three worst single-day declines in the S&P 500 index since its 1957 inception. On Monday, the index fell 9.5%, and it tumbled 12.0% Wednesday. The only single-day decline to top those was Black Monday’s 20.5% drop on Oct. 19, 1987 (today’s circuit breakers limit single-day market declines to 20%). As we said, we’re living history.
Remember, our strategies are designed to react to changing market trends—and as we mentioned last week, they have been actively trading this month.
But for all this downside, we think there’s some other data that needs repeating—the potential upside is quite strong. Our research team looked at every one of the S&P’s 20-day periods (since 20 trading days equates to roughly one calendar month) and ranked the worst declines as well as their corresponding rebounds. Over the 20-day period ending Monday, the S&P 500 index fell 29.4%—the second-worst 20-day run in its history.
They also found that rebounds from large declines were quite large themselves. The average one-year price return of the S&P 500 index since its inception has been 8.4%. But the average one-year return following a 20-day drop of 15% or more is 20.9%, or two-and-a-half times the norm. Again, we can’t say when the rebound will happen, but we do believe that when it comes it will be unexpected and hopefully not just rapid but sizable.
In fact, it may not take much to start a reversal. With markets pricing in what we believe are worst-case scenarios, bargain-hunting buyers may be getting set for their own (positive) run on the markets.
You may have heard the old political axiom: Never let a crisis go to waste. We have been through these perilous 20-day drops before and know that these periods are a consistent source of long-term wealth-building opportunities. We are continuing to monitor our tactical strategies and expect that they will pick up on developing market trends, signaling trades when they appear.
Economic Impacts of Social Distancing
Turning to the economy, people are staying home and economic activity has declined dramatically, though the numbers have yet to be tabulated. What is clear is that the data is going to get worse before it gets better—in our view, the prospect of a recession, whether a short one or a long one, has shifted in two weeks’ time from probable to guaranteed. In fact, while the technical definition of a recession is two consecutive quarters of negative economic growth (GDP), we think that this month plus the next quarter will deliver the quickest, deepest recession in recent history—but we can’t yet argue against an equal probability for the initial stage of a V-shaped or stair-step recovery as soon as the end of the second or third quarter.
So much has happened to market prices so quickly ahead of any known facts that it won’t take much more than one fact to start a backfire against the selling conflagration. As mentioned above, we would not be surprised to see a rush by those seeking bargains to start buying, sparking a positive run for the markets.
Take one example, and one that you can expect will get a lot of attention next week: Jobless claims. Initial jobless claims, a measure of people who’ve lost their jobs and are filing for unemployment benefits, jumped by 70,000 to 281,000 last week—the fourth-biggest weekly increase since 1967.
Based on preliminary data from some 30 states, those filings are likely to range from one million to 2.25 million in next week’s report. That’s well beyond any weekly numbers we saw in the Great Recession and would far surpass the weekly record of 695,000 in 1982. We think that number could push past three million or more—depending on whether or not we turn even a small corner in the current coronavirus war.
The unprecedented scale of layoffs comes from the speed with which employers have had to grapple with the impact of people and businesses making the responsible decision to stay at home. And we expect large, bold headlines heralding these numbers will add to investors’ nervousness.
Mounting Concerns Trigger Mountainous Response
After some miscues from our government and global equivalents, we are finally seeing a massive response. In a series of nine different moves this month, the Federal Reserve has cut overnight bank lending rates essentially to zero, pledged to buy $700 billion of Treasury and mortgage bonds and revived three financial-crisis programs designed to keep markets working. Just today, they also intervened to support local and state governments by making municipal loans more attractive to own.
Importantly, the Fed is also backstopping money market mutual funds, so please don’t let worries about “cash” add to your concerns. We have absolutely no worries about the strength and stability of our money-market providers.
The Federal Reserve has acted—now we need Congress and the president to step up. The initial economic relief package passed Wednesday—free coronavirus testing, increased paid emergency leave provisions, expanded Medicaid funding—is a fine start, as is delaying the filing and payment deadline for 2019 federal taxes, but more stimulus is needed.
None of these actions will stop the virus, but they can help cushion the economic impact. Our investment view: Now is the time for an infrastructure bill that everyone agrees we need but that politicians continue to dither about. Employ three million workers on infrastructure repair—that would definitely help bridge the gap between fear and hope!
Early Silver Linings
Whatever comes from Washington, we’re confident that, eventually, we will get through this event. Yes, some companies will disappear, but those that are more adaptable and stronger will endure, taking up the slack and market share of failed businesses, and adding more workers in the process. Meanwhile, new and innovative businesses will also emerge from the dust.
We’re already seeing subtle shifts taking place. Here’s just a selection:
Walmart is adding 150,000 temporary workers to keep up with demand, expecting many to become permanent employees
Amazon is hiring 100,000 more workers to help fulfill orders and deliveries
Kroger, the largest U.S. grocery store chain, has more than 10,000 job openings
Outschool, an online learning company, is hiring thousands of teachers at up to $40 an hour
Companies supporting remote meetings for homebound workers, like Zoom, Slack and Microsoft, are also hiring to keep up with demand.
Bond Market Dislocations
Many people have questions about the strength and security of bonds given the economy’s disruption. Panic selling has created an issue with “liquidity,” meaning it has become harder to buy and sell bonds, impacting prices. But the issues are mainly ones of supply and demand and are of less consequence to investors than they are to traders.
The companies that issue high-quality bonds will continue to make their interest payments and their bonds will mature at face value. For every seller who may be receiving less for their bonds than they expected, there are buyers who are now able to buy bonds at what they would consider “discounts.”
We know that bonds play an important role as the ballast in well-diversified portfolios. We also expect the bond market to stabilize. In the meantime, know that as you reinvest interest, or the funds you own do, you are buying additional shares at a lower cost and higher yield.
Financial Planning Focus:
Cybersafety During Social Distancing
Technology has been vital in easing the emotional and psychological burdens of social isolation, something we’ve seen in some of the stirring outpourings of online communities large and small.
Unfortunately—as we often find during times of crisis—there’s also been a rise in bad actors hoping that as people spend more time online, they may begin to let their guards down.
Here are some tips to help you keep your online activity as healthy as your hand-washing habits:
The same goes for text messaging apps, which have become new vehicles for spam and online phishing expeditions
Use extra scrutiny—even with legitimate-looking emails you receive from companies you do business with. Many companies have sent emails about their responses to the coronavirus and scam artists are jumping on that bandwagon. If you wish to visit a company online, go directly to their website rather than clicking links in seemingly innocuous emails or texts
The ramifications of getting duped online are upsetting and too common, but vigilance is important, particularly when emotions are running high.
We’re always happy to hear from you, so please don’t hesitate to let us know how you’re feeling or how we’re doing.
Expect the coronavirus and reactions to it to drown out all other news as developments continue to come in at a rapid pace. We’ll be watching the continued progress of stimulus efforts on Capitol Hill, the jobless claims data for this week and other reads that may begin to suggest the scope of the pandemic’s initial economic impact.
As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, March 20, 2020, before the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
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Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.