Through the first month and a half of the New Year we saw stocks continue the upward trend that started in 2019. Then, the bottom fell out. From February 20th through March 23rd, the S&P 500 declined by 34%, the fastest drop of that size in history. Since that date, we have seen a rather breathtaking recovery.
Before getting into the details of what happened in the markets last quarter, we want to congratulate you, even if you may not feel like congratulations are in order. You stuck with your investment strategy during a period of historic volatility. You also managed to live through the worst first quarter on record in the U.S. investment markets.
It was the fastest and steepest roller coaster ride in market history, as measured by the VIX volatility index. One day the markets were down near-record amounts. Then, as it felt like perhaps the free-fall would never end, we experienced near-record single-day gains. It has been a tumultuous few weeks that, truth be told, have felt like years for many. We confess to gaining a few more gray hairs ourselves.
There was little place to hide in the investment markets. The S&P 500 partially recovered from their steep losses to finish down 20% for the quarter. Investors in smaller U.S. companies were hit even harder with a 31% decline in the first quarter. Investors in international stocks are basically in the same boat, losing 23% during the quarter.
Bond returns were mixed—the highest quality U.S. Treasuries were positive during the quarter while corporate bonds saw a slight decline. Overall, the bond allocation of your portfolio did exactly what it was supposed to do in times like these—lowered the volatility of the overall portfolio. Additionally, bonds were the source of funds to buy more stocks at these depressed prices. That said, fixed income markets suffered from near-panic selling also. When things get scary, cash becomes king.
You don’t have to ask why investors abandoned stocks like they did. The coronavirus epidemic, social distancing, and the closure of corporate offices, malls, theaters, restaurants, and everyplace else where people formerly gathered to work & play, has raised deep uncertainty about the extent of business disruption in the U.S. and world economies. Economists at the St. Louis District of the Federal Reserve Board are now predicting that the short-term unemployment rate will reach 32%. That is even higher than the unemployment rate during the worst part of the Great Depression, which peaked at 24.9%. At the end of the quarter, a record-shattering 3.3 million people applied for unemployment benefits in a single week! This was followed by an additional 13.5 million initial claims in the first two weeks of April. These numbers are only the beginning; the expectation is that many more Americans will file for unemployment benefits in the coming weeks. With an unprecedented amount of our economy shut down until further notice, there is no question that economic growth going forward will at least be temporarily impaired. The first quarter GDP numbers will likely be impacted as the stay at home order started taking place in March. In addition, the second quarter GDP numbers will likely look even worse. The stock market, being the leading indicator that it is, priced in the worst pretty quickly, but already appears to be looking ahead to the economic recovery likely to begin the third and fourth quarters.
All is not lost, of course. There is every reason to believe that the U.S. will be back at or near the record-low unemployment when people are once again allowed to return to work and leave their homes to go shopping. To stop the bleeding, America’s central bank is pouring more than $3 trillion worth of loans and asset purchases into the U.S. financial system—an unprecedented commitment. The newly-passed CARES aid package is worth an aggregate $2.2 trillion more, $377 billion of which will be used for loans to businesses that are having trouble meeting their payrolls while they sit on the economic sidelines, $560 billion for individuals and families, $500 billion in outright grants to large corporations, and $349 billion set aside for state and local governments. There is also legislation in the works for an additional recovery package to provide even more aid to impacted individuals and small businesses. This may or may not be necessary depending on how long the economy is shut down.
This pandemic event is unlike anything we have experienced in our lifetimes, but disruptive market events are all different. The current crisis takes a different form compared to previous crisis. However, investors’ reactions to these events have followed a similar pattern. It has been said that while history might not repeat itself, it does rhyme.
Let’s look at the prior 30%+ declines in the Dow Jones Industrial Average going back to the 1960s. There have been six such events that have passed the 30% threshold, including the most recent one this year.
The one thing all these past periods have in common is they ended and did so at levels that are not too far off the lows we experienced in March. We can’t predict with any certainty where the market is headed in the coming weeks and months (no one can, despite what the talking heads on your TV would have you believe). One thing we do know for certain is that to be a successful long-term investor you don’t have to know where the market is going in the near term. You just need to be patient, stick with your plan through thick and thin, and be willing to buy more stocks when everyone else is high-tailing it for the hills. I’m truly proud of our clients as I reflect on the past quarter, because you did just that.
One final thought: trying to stay calm and rational when faced with constantly terrifying breaking news headlines, and all while the markets are tumbling, can be physically, mentally, and emotionally exhausting. Sitting and staring at doom and gloom headlines and flashing red numbers is terrible for your mental health. Take a minute to consider if you’re spending too much time obsessing over the daily virus stats, White House and governors’ news conferences, and tracking every move in stock prices. If you have a solid plan in place, you don’t have any need to be reacting to these things on a day-to-day basis. They cannot derail you. It’s okay to give yourself a break from all of this, so please do!
There are times when we all face challenges more important than the ups and downs of the markets, and this period certainly qualifies. Staying safe, staying well, staying alive, and keeping our loved ones out of harm’s way takes priority in this global pandemic.
We are, of course, monitoring the markets. We’ve harvested millions of dollars of tax losses for our clients over the last month or so, and we’ve bought more stocks for everyone as the markets sank deep into negative territory. This is what we always do, and it is something that has and will continue to benefit you as the markets continue to recover. When the markets get back to even, you will not just be even; you’ll be ahead.
We believe that people who made panic-stricken departures from the market over the last couple of months have overestimated the long-term harm Corporate America and their business counterparts around the world will suffer. As traumatic as this has been for all of us, it will likely fade into memory as the years unfold, much like 9/11 did.
Please feel free to reach out to us with any questions about the markets, your planning, or your portfolio.