First quarter returns for the S&P 500 were -19.6% and represented the worst first quarter in history. From February 19 to March 23, the S&P saw the quickest decline ever, losing 33.9%. The following week, over a 3-day period, the market gained 17.5% making for the best three-day stretch since the 1930s. Through midday on Tuesday, the S&P 500 was higher by over 10% this week alone and is now 23% above the March 23 bottom. While unsettling, these violent swings in stock prices reflect the incredible uncertainty facing investors and the alarmist news flow we read and watch each day. Data released over this past weekend shows virus trends may be turning a bit more positive. This would go a long way towards further improvements in sentiment and would be a welcomed first step back towards calmer markets, yet, we have only just begun to see the ugly jobs and earnings reports coming up over the next four weeks.
It is sobering to think how quickly and how profoundly the coronavirus outbreak has impacted our daily routine and our everyday lives. For now, this remains a public health crisis, first and foremost. Yet, the longer this pandemic continues, the greater the chance that there could be more permanent damage done to consumers and our economy. We have never intentionally shut down the vast majority of our economy for a sustained 4-8 week time period, so this truly is unprecedented. As a result of this shut down, the lack of visibility across corporate America is astounding. There are too many uncertainties to have conviction in earnings estimates, and as a result, the valuation of stocks. Until we have a better sense that the virus is under control, this self-induced economic-coma gripping our country is unlikely to end and markets are likely to remain volatile. To that end, the duration and magnitude of this “pause” remains uncertain and unknowable. But understand, this pandemic will not last forever and we will get through this.
Our team has rigorous debates, daily, discussing the virus, the fiscal and monetary response, the impact on the consumer, the impact on a variety of industries, sectors, and stocks and ultimately what the long-term impact on our economy might be. Distributions in the form of direct payments to consumers, plus grants, loans and assistance for small business, will hopefully bridge the gap between now and when our economies reopen, but even that will not be a panacea to return to the higher growth expectations we saw earlier this year. 2020 is shaping up to look like somewhat of a ‘lost year’ and investors will soon start focusing their attention on 2021 and beyond. At this point, many companies are truly in survival mode; hoarding cash, drawing down lines of credit, eliminating share buybacks, and pausing dividends to weather the storm. Many management teams have removed forward guidance for earnings and revenues given the incredible amount of uncertainty that exists today. Quite clearly, even they don’t know how bad things may get in the short-term.
However, for long-term equity investors, this will likely provide an opportunity to buy great companies at a huge discount to where they traded only 8 short weeks ago. Our sense is that we are not there yet, and it would not be surprising if we were to experience more volatility, either up or down, in the short-term. The “news flow” relating to the economy and corporate earnings will be awful over the next month, highlighted by the April jobs report (scheduled for release in early May) which will likely show unemployment levels approaching 10-20%. However, we recognize that if this self-induced economic recession is short-lived, stocks may start looking attractive sooner, rather than later. When we see virus trends have indeed turned and have a better sense of when the economy restarts, it will be easier to get constructive on equity markets. Given the amount of monetary and fiscal stimulus injected into the system, equaling roughly 10% of GDP and 3x the amount provided during the global financial crisis, we expect a jolt for a recovering economy and the stock market, as a whole.
As always, your Relationship Manager is available to discuss any questions or concerns you may have.