May 2020 - Forging Ahead Amid Uncertainty

David L. Johanson |

SUMMARY

  • Adaptation during pandemic
  • Fed intervention
  • Rally in stocks

Before a big fight, boxing champion, Mike Tyson was asked, “What’s going to happen?” in this fight.  His opponent had planned on giving Mike a lot of lateral movement.  His opponent was going to weave, dance, and move.  Mike simply told the reporter, “Everyone has a plan until they get punched in the mouth.”

That quote resonates with the COVID-19 pandemic of today.  It is really all about adaptation, such as modifying your financial plan (if you need to), invest more, save more, reduce spending.  It is a great time to reevaluate your current situation.

We vividly recall the Financial Crisis of 2008.  The economy was quickly contracting, several financial institutions required bailouts, layoffs abounded, and the stock market plunged.  A decade later, we are grappling with fear tied to a health crisis.  Back in 2008, we could attend the theater, eat at a restaurant, travel, or enjoy live sporting events.  The roots of today’s crisis are different, and we are in the midst of both an economic, AND health crisis.

It is unsettling for us, you, and everyone we know.

As we are all aware, the speed in the decline of stocks were swift.  Since the peak on February 19, 2020, the S&P 500 Index shed 34%, plummeting to its most recent low on March 23, 2020.  The pace of the sell-off can be traced to the enormous amount of uncertainty tied to shutting down major portions of the economy.

We strenuously counsel against trying to time this market.  We do not know what might happen during the coming months/years, but the long-term historical trend has been favorable.  Let’s continue to keep our long-term financial goals in mind, even during these trying times.

April’s Bounce off the Bottom

April 2020 was the best month for the S&P 500 since January of 1987.  Off the low, the S&P 500 Index has rallied approximately 30%.  The recovery has been cautiously encouraging, and we believe there are a few variables that can be cited.

First, the federal government passed the CARES (Coronavirus Aid, Relief, and Economic Security) Act.  The bill includes over $2 trillion in spending, generous unemployment benefits, loans and grants to businesses, stimulus checks, and more.  It offers a much more aggressive response than in 2008.  More will be needed, but it is a good start.

Second, the Federal Reserve has aggressively responded.  Pre-crisis, there were questions whether the Fed had the necessary means in its tool kit, given that interest rates were already low.  Apparently, they do, as investors liked the Fed Chair’s comments last week that “it will do whatever it takes” to support the economy.

The two-pronged attack has not been executed flawlessly, but it has cautiously encouraged investors to dip their toes back into stocks, seeing better days ahead.  While the economic outlook remains fluid, investors are trying to discern some form of economic recovery during the second half of the year.

Third, there are signs the virus may be peaking.  An April 12, 2020 headline in Bloomberg News offered a cautiously upbeat headline: “CDC Says U.S. Near Peak.”  With signs that new cases may be peaking, talk is surfacing over how to best re-open some industries.

There is good reason for optimism for finding a remedy to COVID-19.  According to the Milken Institute there are more than 150 drugs being actively tested against the disease.  Most of those will fall short, but some of them are likely to work.  We are hoping additional treatments gain more approval and acceptance.

Second Quarter (Q2)

We now think real GDP contracted around a 3.7% annual rate in Q1, led by a massive drop in inventories and declines in consumer spending, business investment in equipment, and commercial construction.  The forthcoming Q2 results may be ugly, but it might not be a surprise.  

Q2, which began April 1, 2020, could be our worse in 60 years.  How much worse?  Let’s put it this way, since 1947, the worst quarter in our history was a 10% annualized drop in Q1 of 1958, on the heels of the Asian Flu.  In the current quarter, real GDP is likely to drop to an approximate 30% annual rate, rivaling declines unseen since the wind-down from World War II in 1945 as well as the Great Depression.

With 30 million unemployment claims, we expect an unemployment rate that flirts with 20%, compared to highs of 10% in the aftermath of the Great Recession in 2009 and 10.8% at the end of the brutal 1981-1982 recession.  

The key for investors to remember is focus on the bigger picture - how quickly we are going to recover, which will depend on finding ways to carefully ease lockdowns, the tempering of the Coronavirus in the months ahead, the timeline for developing therapies, and, ultimately, the timeline for developing a vaccine.     

We are in uncharted economic territory, and the future is quite opaque.  But the rally in stocks are an attempt by investors to sniff out an economic bottom and eventual economic recovery.

Remember, no one rings a bell that sounds the all-clear signal.  Collectively, markets attempt to price in future events.  We would expect large daily swings, both to the upside and downside, to continue amid the uncertainty.

Final Thoughts and Hope

These are no doubt challenging times, but so too were 2008, 2001, 1990, 1987, etc.  We feel more secure during this decline as is seems that a resolution is in sight.  Today, the end game is a treatment or a vaccine for future prevention of COVID-19.  A vaccine cannot come soon enough.  It appears that early 2021 could be plausible.  We can prepare for headwinds that may take place and want to position ourselves to take advantage of any tailwinds as conditions improve.

As a young advisor, I was understandably stressed in 1987, as I saw the stock market get thrown back 23% in one day.  We call it Black Monday now, but it is just one of several hurdles in my career.  Since that time, the drops, recessions, and bear markets do not seem quite as scary.  I know the worst thing to do is overreact to them.  How we behave during bear markets could have potential to destroy wealth.

We do not want to downplay the havoc created by COVID-19.  We are living in a world that nobody could possibly have envisioned a few months ago.  The impact caused by the virus has disrupted life around the globe.

Fortunately, our markets entered the downturn in the best possible shape, with household and business confidence at near record levels.  Whether the shape of our recovery is a “V” or “U” shape, there is little doubt that pent up demand should provide a very strong rebound at some point.

There is other good news, unexpected blessings having surfaced.  People are reaching out to family and friends via text and email.  Some are even connecting the old-fashioned way–by phone.

Families are closer than they have ever been before.  Activities and jobs around the country have been suspended but not ended.  We hope to see an economic recovery take root and the pandemic subside.

We are a resilient people.  Together we will get through this dark night, and we will be stronger for it.  Investors who can grit their teeth during this crisis may be rewarded in the years ahead.

Stay safe and healthy.  We have been having a lot of virtual meetings lately.  Our clients are adapting well.  It has been great to catch up with many of you.  We hope to talk to the rest of you soon.