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Market conditions, as well as our daily lives, have taken a dramatic turn over the last month. It was less than four weeks ago that markets were at all time highs and coronavirus was a problem for China. Fast forward just 26 days (18 trading days), and markets have sold off 30%, 153 countries/regions* have been infected and many countries’ citizens are either in complete lockdown or severely limited in daily movement. This has been the quickest move into bear market territory (21 days for a 20% peak to trough decline) by far (comparatively, the next quickest bear market was 42 days during the onset of the Great Depression in 1929). The speed and magnitude of this move has been unprecedented and combined with the uncertainty of the human impact of the coronavirus, has caused fear, anxiety and in some cases, panic.
We will not attempt to give a prognosis on COVID-19, but the consensus from medical experts is we will get through it. This is not projected to be the 1918 flu pandemic, where 1/3 of the world’s population became infected and 50 million people died. The question with COVID-19 is more along the lines of how long drastic measures will be needed to keep the population safe and ultimately, what is the market and economic impact.
Why is the Market Moving Up and Down 5% - 10% a Day?
The stock market is usually a good price discovery mechanism. Most times, stocks trade on the basis of economic factors, such as employment rates, consumer strength, interest rates and manufacturing health as well as corporate fundamentals like cash flow, current (and future) earnings, balance sheet strength and estimates about future growth. From a market perspective, fundamentals have completely broken down.
Unfortunately, the coronavirus has caused a severe global economic shock with a huge contraction in consumer activity and industrial activity. Social distancing, self and mandatory quarantines, prohibition of gatherings of any size greater than 10 have all served to buy us some time to flatten the infectious curve, strengthen medical care, limit hospitalizations and hopefully save lives, but it has also devastated the economy. Fiscal and monetary stimulus are necessary to support impacted sectors of the economy and to ensure that credit markets do not freeze up (more on this below). Individual States will need to provide support to the millions of employees in industries that face furloughs, including restaurant, retail, and transportation workers. Regardless of any progress made to support the economy, the news flow from around the globe is likely to be much worse over the coming weeks and may result in continued volatility and huge daily price swings.
The Market is Down 30% - Do You Expect it To Fall Further?
We do not have a crystal ball on short-term moves in markets but given the VIX index is trading at a record high (above 82!) we expect continued extreme volatility and would not be surprised if we retest and exceed the lows.
At least economic help is on the way as recent monetary and fiscal stimulus actions and plans follow a similar playbook that historically leads to calmer markets. For instance, the Federal Reserve has provided an estimated $3-5 trillion of monetary stimulus through:
· Cutting the Fed funds rate by 100 bps to 0%
· A $700+ billion bond buying program (quantitative easing)
· Injecting $1.5 trillion into the markets to smooth out difficult trading conditions
In addition, the government has stepped in with a greater than $1 trillion fiscal stimulus to support individuals and severely impacted businesses:
· $8.3 billion towards coronavirus treatment and prevention
· Declaring a federal state of emergency which allows the government to distribute up to $50 billion of aid to states and cities
· An estimated $50 - $100 billion economic stimulus package providing paid sick leave to workers, enhanced unemployment benefits, free coronavirus testing and state food aid programs
· An additional $1 trillion in stimulus which will be a combination of the Democratic House and Republican Senate ideas encompassing things like money for schools, public transportation, expanded Medicaid funding, investment in health care as well as direct cash payments to all Americans and help to specific heavily impacted sectors like airlines and leisure (as of this writing, this is all under negotiation)
How is Market Street Managing Client Portfolios in this Environment?
Clients have heard us say we manage their money for the long-term. Our philosophy is to use a set of diversified assets to help clients meet their objectives by providing the highest expected return for a given level of risk. In addition, we will allocate or rebalance to asset classes based upon the attractiveness of current valuations. Extreme volatility like we are seeing today often provides dislocations in asset classes that are not based upon fundamentals. We believe we are now in a period where some very attractive returns can be had if investors are willing to be patient. Markets today have priced in a Global Financial Crisis scenario. It could be worse than that, but analysis today suggests that will not be the outcome as both the consumer and the economy started this crisis in a much better financial position. Even with drastic earnings reductions and a contracting market multiple, we believe stocks will be priced significantly higher down the road. Once the coronavirus is beaten, both domestically and globally, the snap-back in economic activity from months of pent up demand will likely be powerful. It may take 6 months, 12 months or two years, but we believe the returns available to investors will be worth the wait. Our timing will not be perfect, but equity markets will likely be in a much better place in 2021, if not by the end of this year.
Last year, in a powerful up market, client portfolios became overweight equity and underweight bonds and we sold equities as they appreciated and became more expensive. In 2020, the opposite has happened. Clients are now overweight fixed income and underweight equity as the market has sold off. Therefore, we believe that rebalancing portfolios back into equities over the next few months will provide more attractive returns to clients over the long-term.
Please feel free to contact your Relationship Manager or an Investment Team member if you have any additional questions or would like to discuss further.
*Johns Hopkins University & Medicine; Coronavirus Resource Center map; coronavirus.jhu.edu/map.html
This material has been prepared by Market Street Trust Company. The views expressed herein represent opinions of Market Street and are presented for informational purposes only. They are not intended to be a recommendation or investment advice and do not take into account the individual financial circumstances or objectives of the investor who receives it. Certain statements included in this presentation constitute forward looking statements. Forward looking statements are not facts but reflect current thinking regarding future events or results. These forward statements are subject to risks that may result in actual results being materially different from current expectations.
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