“Life is not about waiting for the storm to pass. It is about learning to dance in the rain.”
~ Vivian Greene
- The Markets
- It’s Unsettling for Everyone
- A Bounce off the Bottom
- Q2 Will Be Ugly
- Final Thoughts & Hope
These are strange times to say the least. I have started writing a “My Views from Wall St. to Center St.” so many times I have lost count since the coronavirus has consumed our lives. But, each time I begin, the news and date changes. So, we (B&H) have been getting “emergency” communications out to our client base. The list of things grows by the day (next one will be about re-opening our office). It’s time for me to express my views and provide some context into the “craziness” that we are all now living and investing in. Keep in mind the date is 4/25/20 that I’m writing this and a lot can and probably will change before you read this.
But here goes:
I haven’t slept much in the last 2 months. The news has had an obsessive hold on me. The disease is awful. The markets are volatile and frankly it makes no sense to me at this moment (more on this throughout the letter). I know, I need to follow my own advice that I give you; Turn off news, don’t watch it all the time. I have not been very good at following that advice, but I’m working on it. It’s been a battle to find any energy. You may feel the same way. I have started reading “Positive Dog” again. It’s a book by Jon Gordon; it’s my go-to during “difficult” times. Many of you have heard me talk about it before. I highly recommend it! I’m looking for some positive energy!
I also believe we are seeing some better news about the virus. The “curve” seems to be flattening and the “social distancing” has helped slow the spread of the virus. These are two phrases that will now be part of our vocabulary forever! We are getting ready to begin the “reopening” of the country – B&H will reopen our physical location on Monday, May 4th. We will send out a separate communication on our initial guidelines to keep our clients and staff healthy. Like you, I hope and pray the reopening is successful and the virus does not start spreading again. A little bit of normal will be nice!
We vividly remember the financial crisis of 2008. The economy quickly contracting, several financial institutions required bailouts, layoffs abounded, and the stock market plunged.
But we weren’t grappling with fear tied to a health crisis then. We could go to movies, eat at a restaurant, travel, or enjoy a live sports event. The roots of today’s crisis are different, and nowadays we are in the midst of both an economic and health crisis. Activities outside the home have been greatly curtailed.
It’s Unsettling for Everyone
We are all aware, the speed of the decline in stocks has been swift. Since the February 19th peak, the S&P 500 Index shed 34% to its most recent low on March 23rd (St. Louis Federal Reserve Data).
The pace of the sell-off can be traced to the enormous amount of uncertainty tied to shutting down major portions of the economy. What will the impact be? The brightest minds continue to debate this.
A Bounce off the Bottom
Since last month’s low, the S&P 500 Index has rallied 24% through April 27th (Bloomberg L. P.). That puts the market down about 16% below its 2/19 peak (St. Louis Fed date). The recovery has been cautiously encouraging, and I believe there are three variables to be cited.
First, the federal government passed the CARES Act. The bill includes over $2 trillion in spending, generous jobless benefits, loans and grants to business, stimulus checks, and more. It offers a much more aggressive response than in 2008. More will be needed, but it’s a good start.
Second, the Federal Reserve aggressively responded. Pre-crisis there were questions whether the Fed had the necessary tools in its tool kit, given that interest rates were already low. Apparently, they do. There does not seem to be much that they can’t or won’t do to keep the credit machinery moving.
With much greater speed than in 2008, the Fed has launched numerous programs aimed at propping up the economy – from big business to Main Street.
The two-pronged attack has not been flawless, but it has encouraged investors to dip their toes back into stocks. While the economic outlook remains fluid, investors are trying to discern some form of economic recovery in the 2nd half of the year.
Third, there are signs the virus may be peaking. An April 12th headline in Bloomberg News offered a cautiously upbeat headline: “CDC says U.S., Near Peak; 70 Vaccines in Pipeline.”
So, some parts of the country are beginning to reopen in phases, including East Tennessee and more specifically B&H is opening on May 4th with specific guidelines to protect the health of our clients and staff. Information on this will come in a separate mailing and of course by calling or utilizing our website.
Q2 Will be Ugly
Initial GDP numbers for Q1 indicated (-) 4.8% contraction in the economy. Estimates for Q2 are far worse than that. Some forecasts say the contraction in the economic activity could be as much as 50%. That’s unprecedented. In reality, we don’t know how steep the downturn may be during the April – June period.
In the last 6 weeks, jobless claims total an astounding 30 million. For perspective, during the 18-month long 2007 – 2009 recession (as defined by the NBER), first-time claims totaled 9.6 million.
However, the horrible economic news was brushed off this month by investors. The S&P 500 Index had its best month (April) since 1987. It’s not that bad news for Main Street is reason for Wall Street to celebrate; far from it. We are in unchartered territory, and the future is quite opaque. But the rally in stocks is 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 future events. I would expect large daily swings, both upside and downside, to continue amid the uncertainty.
We don’t know if we will see an uptick in new cases as we begin to reopen the economy. We don’t know if an effective treatment will be developed (early trials of the drug Remdesivir are promising) or how quickly a vaccine might come online. And, for that matter, we don’t know how quickly most folks will venture back into restaurants, airplanes, or the public square.
For the reasons cited above I believe the market will continue to struggle to the downside over the coming months. So, I will continue to monitor and adjust portfolios over the coming weeks and months as I evaluate the conditions and our holdings. While I have made some adjustments to specific portfolios in late March and early April, we made defensive moves in portfolios in the fall of 2019 – reducing stock market exposure and increasing bond and cash holdings. I did this because I believed the market was getting too pricey and that 2020 would be a difficult year. If you look back at “My Views” since 2017, I have been worried about a recession. Of course I had no idea we would have a worldwide pandemic, but recessions and market crashes are “event” driven. This one is unprecedented and our way out of it still unknown. But, our portfolios have held up well and continue to be defensive at this time. Our office will be reaching out to each of you over the coming days and weeks to schedule a time to discuss your specific plan.
Of course you know you can contact us at any time.
Final Thoughts & Hope
I don’t want to downplay the havoc created by the virus. We are living in a world that nobody could have possibly envisioned a few months ago. The impact caused by the virus has disrupted life around the globe. Most of us are fortunate around here. I don’t know anyone personally that has had the virus, but I talk to colleagues in New York, Nashville, and elsewhere who have friends and family who are dealing with this disease. It’s very real to them and incredibly unpleasant.
Yet unexpected blessings have surfaced. People are reaching out to family and friends via texting and emails. Some are even connecting the old fashion way…by phone. Families are drawing closer than they have ever been before. Activities and jobs around the country have been suspended but not ended. And I am confident that we will see an economic recovery take root and the pandemic will subside.
We are resilient people. Together we will get through this dark night, and we will be stronger for it.
Stay safe and healthy and positive. I know I’m trying to. See you in the office soon!