A Smarter Way to Invest Market Summary 4-3-2020
Provided By: Adam Blocki, CFA, CFP® – Senior Portfolio Manager
The bull market ended just days after its 11th birthday. On March 9th, 2009 the S&P 500 closed at what would prove to be its low point in the wake of the Great Recession at 676.53, just a day after touching an ominous intraday low of 666.79. almost eleven years later it would reach its peak on February 19th, 2020 at an all-time record close of 3,386.15, a rise of more than 400% from its 2009 low. Less than a month later, on March 11th, the S&P 500 crossed below the level of 2,708.92, officially more than 20% below its previous high, ushering in a new bear market.
Nearly everything finished negative for the month of March, the only question was by how much. The S&P Large, Mid, and Small Cap indexes lost 12.5%, 20.4%, and 22.6% respectively. The Dow Jones Industrial Average fell 13.7% while the NASDAQ dropped 10.1%. Internationally, the MSCI EAFE Index for developed markets gave up 13.8% while the MSCI Emerging Markets Index finished the month 15.6% lower. All eleven S&P sectors declined to varying degrees. Energy (-34.4%) and Financials (-21.0%) were the largest losers while Health Care (-3.9%), Consumer Staples (-5.5%), and Technology (-8.6%) were the only single-digit decliners.
The only broad asset class to rise over the month was government bonds (IEF, 3.6%). Gold (GLD, -0.2%) posted minimal losses while commodities (DJP, -16.0%) were rocked by the collapse of oil prices. Non-government bonds saw some very volatile gyrations during the month as uncertainty began to creep in regarding the ability of specific issuers to meet future interest payments. Investment-grade corporate bond ETF VCIT finished the month down 7.5% but fell as much as 16.3% from its February close during the month. Similar action was seen in municipal bond ETF MUB (-3.2% for March, -14.3% at March low) and high yield corporate bond ETF HYG (-10.4% for March, -21.5% at March low). With government-mandated shutdowns in force across the country, service sector businesses aren’t the only ones seeing revenue fall off a cliff. In New York City, one of the hardest hit areas, public transportation has seen ridership fall by anywhere from 49 to 90%1. This provides some perspective on why even municipal bonds were seeing unprecedented volatility until intervention by the Federal Reserve provided some needed clarity.
By now everyone is aware that the cause of all of this is the spread of the novel coronavirus. Accordingly, this entire edition of our newsletter will aim to at least touch on the many, many aspects of the rapidly evolving situation. We will focus our attention on the impact on the economy as well as the stock market and avoid discussing anything from a medical perspective.
Let’s start with the unprecedented volatility. As mentioned in the opening paragraph, it took a record-short 15 (!!) trading days for the S&P 500 to fall from record-high close to bear market territory, half the previous record of 30 days in 1929 at the outset of the Great Depression2,3. The low point for March came on the 23rd when the index was more than 35% off of its high in only 23 trading days. From the March 2009 low to the February 2020 high, the S&P 500 had an annualized daily volatility of about 15.5%4. From February 19th through the end of March, the annualized daily volatility of the S&P 500 was more than 82%. From the low-to-high of the bull market, the average daily return was 0.06% with a standard deviation of 0.98%. According to the assumptions built into the normal distribution5, these numbers mean that over this period, we would expect the daily return to be more than 3.01% or less than -2.89% only 0.3% of the time. From February 19th through March 31st, 20 out of 29 trading days (69.0%) had daily returns outside of that range. Accordingly, the CBOE Volatility Index (VIX) has risen from its February 19th close of 15.56 to 57.06 as of the end of March, hitting as high as 83.56 on March 15th6.
Lacking clear guidance at the Federal level, state and local governments enacted a patchwork of shutdowns in their jurisdictions. What often started as social distancing guidelines to stay 6 feet away from other people morphed into shelter-in-place orders that permitted only essential businesses to remain open. The service and entertainment economies went into a standstill seemingly overnight as bars, restaurants, movie theaters, sports venues, museums and many more businesses were forced to close and various travel restrictions went into effect. This has led to severe economic consequences as revenue at many small and even large businesses dropped to essentially zero. Local businesses have rushed to adapt their business models to the new reality with many offering “to-go” and “contactless” services even if they hadn’t before simply to generate whatever revenue they can. As these changes take place, the demand for labor has shrunk considerably and layoffs are taking place in mass. While the total economic damage caused by the pandemic won’t be entirely clear until long after the threat has subsided, we have started to get a peek at what lies ahead.
Every Thursday morning, the U.S. Department of Labor releases its figures on the number of Americans who filed for unemployment benefits during the previous week. For the seven days ended March 14th, the number was 282,000. During the Fall of 2007, before the Great Recession, the number hovered around the low-to-mid 300,000s. From there, economic conditions slowly deteriorated, companies began laying off workers, and the number steadily rose over the next 18 months to a high of 665,000 in March 2009. The record high for any single week was 695,000 in October 19827. We got our first idea of how bad things were in the data for the week ending March 21st when the number rose to 3.3 million, almost five times the previous high watermark. Unbelievably, things got even worse this week when the number doubled to 6.6 million. These figures combined represent 3.8% of the working population filing for unemployment. Over the entire course of the Great Recession, 4.6% of the working population filed for unemployment benefits. That was over a period of two years; this has been two WEEKS. The field of statistics doesn’t really have a good way to demonstrate just how historically incomparable these figures are.
Goldman Sachs issued a report outlining their anticipated impact on GDP and employment8. Their original estimates predicted an unemployment rate of around 9%, not quite as bad as the Great Recession high of 10.1% in October 2009. After seeing the March 21st jobless figures mentioned above (3.3 million), Goldman updated its prediction to a much higher unemployment rate of 15%. That would be the highest by far since WWII, more than 4% above the 1982 peak of 10.8%. However bad that figure might seem, it is positively exuberant compared to a prediction from the St. Louis Fed (before any government stimulus was factored in) that saw unemployment peaking around 32.1%9.
As for GDP, Goldman’s report predicts Q1 2020 growth of -9% followed by an even worse Q2 at -34%. THIRTY. FOUR. PERCENT. For the full year, they anticipate a contraction of 6.2%. For comparison, the worst quarter during the Great Recession was Q4 2008 when GDP contracted 8.4% and the worst quarter on record came in Q1 1958 with a contraction of 10%. As far as the full-year projection of -6.2%, that would be the worst since the Great Depression. Their worry is not only the immediate impact of forced business closures but also second-round effects that could present themselves further down the road. Now for the good news. Their forecast called for an equally stunning Q3 rebound of 19%, which would also be a single-quarter record. They cited the combination of robust fiscal and monetary stimulus (outlined below) as providing the fuel for a strong recovery.
While both the stock and labor markets imploded at record paces, oil prices staged a historic collapse of their own. What started as a decline linked to falling Chinese demand evolved into a worldwide demand slump and then further compounded into a geopolitical war between OPEC+ countries. In early March, the member countries held a weekend meeting to address the looming end of a previously agreed to cut in production10. At the meeting, Russia and Saudi Arabia were unable to come to an agreement as to what production levels should be going forward in light of the ongoing pandemic and the ensuing drop in economic output. As a result, Saudi Arabia committed to unlimited production in an attempt to start a price war and force Russia to acquiesce. Oil prices, already down significantly year-to-date and approaching multi-year lows, plummeted on the news and have continued to free-fall since with Brent crude approaching $20 per barrel 11. Some obscure types of crude have even traded at negative prices in recent days12. Producers are essentially paying people to take their output away from them as they have nowhere else to store a product whose demand has evaporated.
As we mentioned above, both the Federal Reserve and Washington D.C. have stepped up to the plate to support the economy and individuals. On the monetary side, the Federal Reserve was quick to act. Last month we talked about their emergency rate cut of 0.50% but they one-upped themselves with further cuts going all the way to 0%. They also pledged additional support even beyond the actions taken in response to the Great Recession including buying commercial paper (short-term corporate borrowing for businesses’ everyday cash flow needs), expanding the collateral accepted from counterparty borrowers, and purchasing commercial mortgage-backed securities13. All of their actions aimed to prevent a credit crisis that would further compound existing problems.
On the fiscal side, lawmakers passed the CARES Act which provides up to $2 trillion in stimulus to individuals as well as businesses. First is the direct payments to individuals. Every taxpayer is eligible to receive a one-time payment of up to $1,200 per person ($2,400 for married couples) plus $500 for eligible children. These amounts begin to phase out at AGIs over $75,000. Payments will be based on the most recently filed tax return, either 2018 or 2019 (For more information, consult your tax professional or financial advisor). Small businesses were also a focal point of the relief bill. Those businesses meeting certain criteria will be eligible for forgivable loans of up to $10 million for payroll support in addition to other tax credits and extended payment windows. Finally, certain corporations including airlines and other sectors ‘critical to national security’ as well as local governments are eligible for emergency lending. Already, some are anticipating a fourth round of stimulus that would specifically address the municipal issues we mentioned at the outset of this newsletter.
Saying that these are unprecedented times is an understatement. Within a matter of weeks, our entire global society has undergone forced changes that have interrupted our ways of life and run the economy straight into a brick wall. While we cannot know for certain what the economic impact will be on our individual lives or in aggregate, we have gotten a glimpse and it looks grim. The silver lining is that, as always, this time is different. In 2008 and 2009, each of us individually could do nothing more than sit back and watch the bad news compound as the misdeeds of the past caught up with the present. We had no influence over the problem or the solution other than watching the attempts to untangle the mess in front of us. This time, however, each of us can play a small part to bring about an end. The market and economy are both waiting for the spread to slow and new cases to drop. We can all heed local guidelines to stay in our homes, avoid large public gatherings, and encourage others to do the same. When things do eventually reopen, we can slowly reintroduce elements of our old routines and assess the threat level instead of jumping back into everything at once. If each of us takes small and thoughtful actions, we can cumulatively have a large and meaningful impact. Stay safe, stay socially distant, and stay invested.
Adam Blocki, CFA, CFP®
Sr. Portfolio Manager
1 https://bit.ly/3bNvNh2 | 2 https://on.ft.com/2JAT1L6 | 3 YCharts data | 4 YCharts data | 5 https://bit.ly/2UUg9JO | 6 https://cnb.cx/3aC5sCs | 7 https://yhoo.it/3466GDj | 8 https://cnb.cx/2wUPLHR | 9 https://bit.ly/345eSnr | 10 https://cnb.cx/2X3pnWN | 11 https://cnb.cx/2xG6Cyf 12 https://bloom.bg/39AcTZz | 13 https://bit.ly/2JzDgUP
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