At the end of 2019 we celebrated an outstanding year for investors but warned we may be getting ahead of ourselves, and to be wary of potholes in the road. It was as recently as February 19 that markets hit new all-time highs, even as the virus was spreading across the globe. This rally then hit the “mother” of all potholes. The US and in the rest of the world is now under siege from an invisible enemy
As markets pushed upward there was serious trouble brewing in the Far East. This proved to be the needle that popped the equity bubble and dropped stock indexes faster and more furiously than ever before. In brief, program, or algorithmic trading (call it what you like) opened a floodgate of sell orders into a thinly traded market. Not unlike the computer exacerbated drop in October 1987. History repeats itself.
On top of this, and unknown to most observers, the world had accumulated more debt than the period prior to the 2008 crash, and fixed income markets began to express symptoms of their own flu. Bond markets were locking up as more and more sectors became less and less liquid. The Federal Reserve was forced to step in (quietly at first) to provide funds to support certain markets.
All of this has made for a vicious past 6 weeks. Markets fell far, and fast, as the world struggled to come to grips with the facts of the pandemic. Though I usually try and inject some lightness to the commentary, there is nothing humorous in the present dystopia we find ourselves in.
Once again, the US Federal Reserve and central banks of the world have ridden in to save us. No, bankers cannot treat an ill patient, invent vaccines, or develop novel therapies for a novel virus, but they can print money. Boy, can they print money. Trillions of dollars are being created, with more to come. The Fed Funds rate was again dropped to just above zero, and US Treasury short-term notes traded at negative rates for a short time. And lest you think the government has any money, just know that the Trillions in approved aid programs is being borrowed from a money printing Fed.
For now, markets have somewhat stabilized though at much lower levels. Experts say the next several weeks will help us understand the longer-term impact of this event – only time will tell, and if the virus cooperates
The second quarter will continue to provide uncertainty, fear, loathing, and plenty of unknowns regarding the path of the economy, and how successful efforts to fight the so-named War on the Virus prove to be. It is understood unemployment will spike dramatically, though funds are already approved to mitigate the impact. The greater question remains how long, and how deep the crisis cuts into the broader economy. This in turn depends on how soon the flattening of the virus infection rate curve takes hold. We just need to hunker down.
The financial impact on your investments may have seen the worst of it, but no one can say for certain. Markets are forward looking and generally lead a recovery during these events as they initially sell off dramatically and start back up as the horrific news cycle improves. As of this writing there is an inkling of some improvement in terms of new infections and hospitalizations, though no one can predict when we climb out of this.
There are no doubts about the severity of this pullback, but we will get through this. It is important that we carefully shepherd our resources, whether it’s toilet paper or financial assets. I’ve already spent more time hunting for TP than I like to think, but at least fuel is cheap.
The positive side of this is that while sports, hotels, cruise ships, restaurants, and airline companies are all suffering mightily, there are sectors which will do just fine and are hiring hundreds of thousands of workers (Walmart, Amazon). Before the drop, the economy was strong, and we can hope for a solid bounce-back as well.
Please note that as bad as things seem, Boeing alone is responsible for 1200 points of the Dow drop, and certain sectors have had a similar outsized impact.
A big concern for clients must be the implications for their financial plans as a result of the present drop in value of their investments. We always counsel that this is a short to intermediate term market movement, and that panic, or selling low, is not an investment strategy. Any changes, especially any involving selling, should only be considered in the context of financial plans. There are investment opportunities in the current markets. Any funds invested now or in the next few months should experience out-sized positive long-term returns, but the meaning of long term can vary from person to person, and no one can predict when the markets will improve.
As we are all now hunkered down and following social separation rules it is regretful that we are unable to engage in face-to-face meetings. Rest assured that we are available and mastering the skills of working away from the office.
Markets were down 37% in 2008, then up 26% in 2009, and up 15%, in 2010, beginning the longest bull market on record. This is a difficult period, but we’ll get past it. Vaccines are being developed at record rates while new drug therapies emerge daily. The news cycle is hyperbolically focused on doom, but there is, and will be more positive news out there.
There is an old saying, “May you live in interesting times.” It is derived from an old Chinese curse, though the author was an English diplomat – it seems especially appropriate this time.