We wanted to share our thoughts regarding last week’s market volatility. We would also like to share our expectations for this coming week and let you know what we are doing about it on our end.
As mentioned in our email Wednesday, the stock market (S&P 500) entered a Bear Market having declined more than 20% from its high point. It represents the fastest bear market of the twelve that have occurred since World War 2. On Thursday, the US Stock market had its worst one day since the Black Monday of 1987, losing over 10% in one day. Bargain buyers entered the market on Friday morning driving the stock market up a bit during the day and then accelerating higher with confidence in the last hour of trading during the Presidential press conference at 3pm. Friday’s 1,900 gain for the Dow Jones nearly negated all of the Thursday market drop. We are living and participating in stock market history right now, although not the kind of history any of us want to be part of.
For the week, the Dow Jones overall declined by 2,679 or approximately 9%. The 10 year US Treasury note increased by +.25% as bonds continue to be a ‘safer’ alternative for nervous investors.
Much of the selling Monday thru Thursday was driven by panic and investors building up liquidity. There was no action or announcement from the Federal Reserve until Thursday nor any substantive communication from our Federal Government until Friday afternoon. With little commentary from our banking and government leaders, investors were more likely to sell and build up their cash.
What our Government is doing
In our email on Wednesday we mentioned we anticipated the Federal Reserve would do something massive to support the economy. We also mentioned the Federal government would partner with private America in a coordinated effort for ‘all hands on deck’. Both of these predictions came true as the Federal Reserve announced Thursday they would inject 1.5 Trillion dollars to keep short term loans flowing and support the financial system. On Friday the Fed bought $37 Billion of US Government Bonds. Tonight (Sunday) the Federal reserve cut its benchmark interest rate to zero and announced a Quantitative Easing (QE) program that will entail $700 Billion of purchases of government bonds and mortgage backed securities to keep interest rates in our country low.
The Federal Government also took action last week. On Friday, by declaring a state of emergency, $50 billion in disaster relief becomes available for the Federal government to use as appropriate. We expect additional measures to be taken such as payroll tax relief, an infrastructure bill and a general push by the government to spend money where it is needed (such as purchasing oil to support American oil companies). Finally the American public witnessed a Friday afternoon White House press conference and saw the CEOs of companies such as Walmart, Target, Walgreens, CVS, Google, Labcorp, Becton Dickinson, Roche and others actively participating in the effort to contain and eliminate the Coronavirus. It will take both the Public Government and the Private Sector to work together for this to happen.
Are we in a recession?
A recession by definition is two consecutive quarters with negative GDP growth. In other words, 6 months of our economy shrinking. For most Americans they will ride out this virus by spending time at home and for many companies their employees will work from home. No doubt this will have an immediate impact on the American economy. We assume economic data for the end of this current quarter will be lower than originally expected. Will the virus shrink our economy for two quarters in a row? It is possible, but likely depends upon how long it takes for the virus to subside. The longer it takes, the more likely we enter a recession. However, even if we do enter a recession, once Americans feel it is safe to go back to work and leave their homes our economy should certainly pick back up again.
What do we think will happen this week?
We expect market volatility to continue, but not to the extent that we witnessed last week. There is an expression applicable to the stock market in a sharp decline of ‘the babies get thrown out with the bathwater’. Over the last few weeks, sellers did not discriminate which companies they were selling, they just wanted to sell for the sake of selling. On Friday we started to see separation in stock prices between companies that will be severely hurt by the Coronavirus (cruise lines, airlines, restaurants) and individual companies that might stand to benefit from it (Clorox, Amazon, UPS). I expect to see this separation continue as investors identify companies worth buying and the ongoing panic selling begins to subside. To be clear, the volatility is not over, but with guidance from the Federal Reserve and Federal Government last week, many investors will now come back to the market to begin to do some buying this week.
What are we doing about it at the office?
We are working incredibly hard. Our advisors are doing their best to communicate with our clients. It is important for us to listen to our clients concerns and opinions and then review with each client their portfolio and how it is diversified. Our research team spends all day each day reading, listening and reviewing research reports and economic data. Like America right now, our firm also has ‘all hands on deck’.
Consider increasing liquidity by moving to government backed mortgage bonds and cash, increasing exposure to certain asset classes in order to benefit from possible future action from the Federal Reserve.
Together we are dealing with a crisis that is both human and economic. We are confident over time ‘this too shall pass’. Please do not hesitate to contact our office with your questions and concerns.
Matthew A. Somberg, AIF®,CLTC®
Co-Founder and Principal
Accredited Investment Fiduciary®