Virus Response vs. Virus Spread - Adviser Investments

Virus Response vs. Virus Spread

March 30, 2020

Please note: This update was prepared on Friday, March 27, 2020, prior to the market’s close.

After a record three-day 21.3% gain for the Dow Jones Industrial Average, The Wall Street Journal proclaimed that a new “bull market” has begun. We wish it were that easy, but for several virus-related reasons, we don’t believe it will be.

Through Thursday, the Dow Jones Industrial Average and the broader S&P 500 index were down 20.5% and 18.2% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 23.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index had fallen to 1.71% from 2.31% last week. On a total return basis, the U.S. bond market has gained 2.2% for the year.

Jobless Claims Don’t Crash Markets

It was a foregone conclusion that this week’s report on the number of workers filing new claims for unemployment would show a massive increase, as the U.S. economy began to shut down in response to stay-at-home and social-distancing edicts from local, state and federal authorities. Despite estimates of anywhere from 1 million to 2.5 million, the actual jobless claims number came in at an unprecedented 3.3 million. That’s four times larger than the worst week on record.

And yet stocks soared, up 6% as expectations for a $2-trillion recovery package rose.

Make no mistake: The unemployment claims number is just the tip of the iceberg. We expect a slew of negative economic and earnings data to be revealed in the coming weeks and are prepared for it to be greeted with yet another wave of market selloffs.

While we were encouraged by the unexpectedly strong surge in stocks that followed this week’s unemployment numbers, we’re going to remain cautious about suggesting that the bear market’s “bottom” is in. What we know is that no one will be able to call the market’s nadir until well after the fact, whether we’ve already seen the worst or not. All that’s certain about the bottom is that, when it arrives (if it hasn’t already) it will mark the day before a stock market recovery begins.

Relief Package Includes Important Investor Benefits

As we go to print, the Congressional relief package had taken its final shape and was heading to President Trump to be signed into law. From what we know so far, however, the $2-trillion behemoth of a bill could have some very important implications for individuals, families, businesses and investors.

The measure is intended to help build and expand a safety net, providing at least a modicum of relief for those in greatest need. The final version includes direct payments to individuals, $377 billion in loans to small business, $500 billion in support of the most distressed industries, aid to hospitals and states and an expansion of unemployment insurance.

The bill also includes two provisions with more wide-reaching impacts for people nationwide by:

  1. Eliminating required minimum distributions from retirement accounts in 2020
  2. Suspending interest on student loans for six months

As always, these broad measures have exceptions and until the bill is signed, sealed and delivered, there is always room for change. We’ll be reading the final version of the bill this weekend, and will have much more to say on its full implications in next week’s Investing for Life blog post, which will go live on our website on Wednesday, April 1.

In addition to what the stimulus bill will provide, the federal government has already taken some steps to help provide relief that may well impact you and your family:

  • The federal income tax filing deadline for 2019 has been extended to July 15, 2020
  • The 2019 IRA contribution deadline has also been pushed back to July 15, 2020

Overall, we think these measures make sense. With shelter-in-place and social distancing now a virtual requirement, we’ve effectively turned off the service sector of our economy across large parts of the country. That’s hugely disruptive—not just to families and businesses, but also to the investment markets. We’re glad to see Congress and the Federal Reserve taking substantive steps to combat this crisis.

The Bond World Turned Upside Down

Investors look to bonds to provide stability and smooth volatility in jarring times—but anyone who has been watching bonds the past few weeks might have thought their portfolio shock absorbers had failed. Selling was widespread, but even many short-term investment grade-bond funds lost more than 5% in just a few weeks’ time.

What happened? The answer comes down to one word: Liquidity. With the virtual shutdown of entire cities, reasoned selling became panicked selling. Only the safest of assets—Treasury bonds—could easily find willing buyers. So, when demand for corporate bonds dropped, so did prices.

Overall, the spasm in the market was reminiscent of the credit crisis of 2008. And as in 2008, the Federal Reserve stepped in, successfully, as the buyer of last resort to ensure the markets continued to function properly.

This week, we’ve seen signs of the bond market returning to normal and that investment-grade and tax-exempt bond funds are recouping some of their losses. Experience tells us that quick, extreme downside moves have a way of leveling off and then rebounding.

Distressing as it is to see bond funds lose value, it’s critical to keep such declines in perspective. First, a bond fund that loses 5% is a far sight better than a stock fund’s 20-plus-percent swoon. Second, the flip side of lower bond prices is higher yields.

While there will be defaults and downgrades—this week, Ford Motor’s bonds were downgraded to junk status—not every company or city, by a long shot, is going to go bankrupt. Many, if not most companies are going to do better than just survive and will continue to repay their debts on schedule.

Over the long term, bonds will continue to lend stability and add income to a well-diversified portfolio, this week’s short-term dislocations notwithstanding.

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Special Podcast: Pandemic Watch—Early Signs of Stabilization in Rocky Markets

The past week has been a hectic one for the markets—anyone who’s been watching stocks’ and bonds’ daily moves might be suffering from whiplash.

In this special episode of The Adviser You Can Talk To Podcast, Vice President Steve Johnson sat down with Jeff DeMaso, director of research for Adviser Investments, to review the market landscape and provide our perspective on recent events.

Listen in to hear Steve and Jeff discuss:

  • The Fed’s intervention in the bond market and its effects
  • Emerging economic data and what it can (and can’t) tell us about the virus’ impact
  • Traders’ reception of the stimulus deal announced Wednesday morning
  • How our portfolio managers are viewing the market

Much remains unclear about the long-term impact of this pandemic on our economy, but Jeff and Steve’s reasoned take on the market should provide some clarity on where we stand today.

Please click here to listen.

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Financial Planning Focus

Time to Review Your Budget

We recently talked about how to maintain your financial plan during volatile times, and this week we’ll focus on one of the few things you can control in this pandemic: Expenses.

As we continue to hunker down during the fight against COVID-19, revisiting your budget may seem like the last thing you want to do, but controlling spending could be the key to riding through the outbreak with your finances intact. Here ­­­are a few strategies to consider:

  1. Update the battle plan. In this sudden new reality, it’s time to change your budget strategy. For many, vacations, weddings and nights out are off the table (particularly for those who have lost a source of income). Redeploy those funds towards new priorities like paying down debts or equipment needed to make working from home more seamless. We’d recommend taking the time to revisit (or create) your budget for the next few months with our budget worksheet.
  2. Build a moat. In times of prolonged uncertainty, your cash reserves provide a welcome spending buffer. As you revise your budget, make sure you’re using cash you’re saving today to build up six months of expenses, if you’re single. If you’re married and have children, bump that up to a year.
  3. Maintain morale. As you rework your budget, once you’ve taken care of savings, put a little aside for something that will lift your spirits if you can. Maybe it’s a Netflix, Hulu, or Disney+ subscription. Or ordering delivery for yourself or your loved ones to support your favorite restaurants—a little self-care helps all of us focus on how lucky we truly are despite the turmoil that surrounds us.

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Adviser Investments’ Virus Response: Resources for Navigating the Crisis

This scale of this pandemic, and the global response to it, have been unprecedented in modern times—and with rumors swirling, headlines screaming, and speculation abundant, it’s easy to be overwhelmed.

We have prepared for just such an event and in addition to our special podcast series, we’ll also be releasing Today’s Market Takeaways, short videos in which one of our investment team members analyzes what the market’s telling us. We think you’ll find our cool, calm and rational response to the market’s machinations a welcome respite from the often overbearing headlines and TV chyrons. Click here to see Friday’s clip featuring Vice President Steve Johnson.

And, as noted, look out for more in-depth coverage of how Congress’ relief response package will impact investors in next Wednesday’s Investing for Life blog post.

Finally, all the resources we’ve gathered in response to the virus, including our podcasts, blog posts, special reports, videos and a letter from CEO Dan Silver, can be found on our new Coronavirus Response page.

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Looking Ahead

Next week, we’ll begin to get a sense of the toll on employment with ADP’s private sector payrolls and the nationwide nonfarm jobs reports, in addition to the weekly jobless claims (all March data). We’ll also get consumer sentiment and reads from the manufacturing and service sectors that should help provide additional clarity.

The cold truth: While the data is likely to be harsh and stark, the more data we have, the better able the markets will be at pricing in the downside risk of this event.

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 27, 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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