The low volatility and record highs from the first few weeks of 2020 already seem like a distant memory. Abruptly, the world has been thrown into the shared struggle of a global pandemic and with it, our economies thrown into chaos. As we all navigate the social and professional restrictions intended to “flatten the curve” of COVID-19’s impact on our populations, we can’t help but wonder how our economies will recover from these unprecedented measures.
Naturally, the most recent economic crisis that we turn to for comparison is the downturn of 2008. Although there was an absence of a triggering public health catastrophe, it’s an opportunity to study how the American government responded to financial crisis, and how long it took those stimulus measures to impact our economy’s recovery. Unlike 2008, the first quarter of 2020 saw the Fed and Congress react decisively with the swift passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The sheer size of these programs has never been seen before in our economic history, and we are already seeing positive impact from these efforts in the form of some stock recovery. However, with emotions now helping to drive an uphill battle to regain economic health, the novel coronavirus has left all but a handful of sectors in a prolonged period of uncertainty, and millions of Americans stuck at home.
U.S. – Still Uncovering COVID-19’s True Impact
GDP: GDP estimates for Q1 are essentially flat while most economists will be looking to Q2 in order to gauge the pandemic’s true effects on the economy. To put the vast uncertainty into perspective, a recent survey has median estimates ranging between a fall of 15% to 65%. Prior to this, the worst quarter in modern history was -10% in 1958. Most of these forecasts assume a rebound in Q3.
The Consumer Price Index (CPI) registered an annualized advance of 2.4% in February, ahead of the COVID-19 volatility in the United States. Inflation was ahead 0.1% in the same period. Consumer spending was at 0.2% in the middle of the quarter, with the University of Michigan’s Consumer Sentiment Index at 101.0. Retail sales were at 4.35%, annualized. The Institute of Supply Management (ISM) Purchasing Managers Index (PMI) was up nearly two points to 57.3, mid-quarter. All these figures may be revised dramatically in the second quarter as more data is compiled about the economic cost of the pandemic. [4,5]
UNEMPLOYMENT: Over 10 million Americans applied for unemployment in March, ending with a record-breaking week of 6.65M claims in one week to close the month. Layoffs and furloughs are predicted to continue throughout early Q2. [2,3]
HOUSING: New home sales moved from -0.4% for December to 7.9% in January, then down again to -4.4% in February. Existing home sales for February rose 6.5%, compared to a 1.3% decrease for January and a 3.6% increase in December 2019. Housing starts declined over Q1 starting at 16.9% for December, -3.6% for January, and -1.5% for February. 
Mortgage rates started the first quarter at 3.72% for 30-year mortgages, 3.16% for 15-year mortgages, and 3.46% for 5/1-year mortgages. By the end of the quarter, 30-year mortgages were at 3.5%, 2.92% for 15-year mortgages, and 3.34% for 5/1 year mortgages. 
INTERNATIONAL: All Eyes on China
As the epicenter of the outbreak, COVID-19 is affecting nearly every aspect of the Chinese economy while the world watches the implications. Anticipating the rough road ahead, several international financial institutions have revised their China growth estimates downward, with some predicting 2020 as the worst year in decades for the People’s Republic. Despite this, the Caixin/Markit Manufacturing PMI came in at 50.1 in March, just within the realm indicating growth, and up from February’s 40.3. As the quarter ended, U.S. lawmakers were questioning the accuracy of China’s reported number of COVID-19 cases as America grappled with the upswing of the pandemic. [6,7]
European countries are also facing hardship, with Italy and Spain seeing a higher-thanaverage number of COVID-19 cases. The European Commission predicts a recession, with the overall gross domestic product (GDP) sinking 1% for 2020. This follows 1% of growth for the GDP in the final quarter of 2019. Facing heavy unemployment, the European Commission set up a 100 billion euros ($110 billion in U.S. dollars) stimulus program to help keep workers employed, while also pledging to purchase as much as 750 billion euros to keep markets at ease. [8,9,10]
Abrupt Reversal From 2019 & Volatility
U.S. EQUITIES: The first quarter of 2020 was one of the worst for stocks in U.S. history, with the Dow Jones Industrial Average sinking over 23% and the S&P 500 dropping 20%. The NASDAQ Composite Index closed the quarter at 7,700.10, down from Q4 2019 by 14%.
DEVELOPED INTERNATIONAL EQUITIES: The arrival of COVID-19 signaled volatility around the globe. The numbers at the end of the quarter include: the U.K.’s FTSE 100 (-13.81%), the German Dax (-16.44%), the French CAC 40 (-17.21%), Japan’s Nikkei 225 (-10.53%), and Australia’s All-Ordinaries (-21.51).
The MSCI EAFE Index which measures performance across developed stock markets outside North America took a 14.77% fall at the end of Q1. 
Interest Rates at 0%
U.S. FIXED INCOME: On March 15, the Federal Reserve cut interest rates to zero percent and announced several monetary actions designed to support households and businesses. Due to the actions of the Fed as well as a sharp drop in economic activity, the 10-year Treasury yield fell to its lowest point on record during the quarter, reaching a low of 0.54% before rebounding slightly to 0.70%. The U.S. Aggregate index gained 3.18% during the quarter, providing limited protection against the bear market. 
DEVELOPED INTERNATIONAL FIXED INCOME: Bonds overseas provided even less protection as investors preferred cash above all else. The BloomBarc GA ex-USD FlAdjRIC Cp Hgd index managed a scant 0.21% gain for the quarter.
Combat Emotion-Driven Markets With a Focus on Long-Term Goals
In our last quarterly commentary, we noted that the relative calm of 2019 was unlikely to repeat in 2020, but little did we know just how swiftly things would change. To put things into perspective, we can look at the VIX, or volatility index, a measure of stock volatility for the S&P 500. After hovering near 12 earlier in the year, it spiked above 80 in just a few days, surpassing the levels seen in the 2008 financial crisis. Stocks sold off in record fashion as well: in less than 30 days, the S&P 500 sold off more than 35%, the pace of which had not been seen since the crash of ’87. It took just 22 days to enter a bear market (-20%), quicker than at any other time in modern history as the chart below illustrates. However, as markets attempt to discount and digest major economic shocks, they can turn again just as quickly as buyers step in betting that the selling is overdone and open up rare value opportunities amid the market dislocation. As a case in point, the Dow Jones Industrial Average posted its largest point gain and fifth highest percentage gain on March 27 – a week after hitting its dramatic 2020 low. Short term market swings are typically driven by investor sentiment and as such, tend to overshoot both to the upside and the down as emotions increasingly correlate with volatility. Although these times of uncertainty are always difficult to navigate, it is helpful to refocus on long-term goals in order to avoid making decisions based on what may be relatively short-term emotion.
Volatility Does Not Equal Complacency
No one can predict exactly what the full economic impact of the COVID-19 epidemic will be. As people and businesses adapt to extended periods of quarantine, the only thing that seems clear is that no aspect of American life will be unchanged. Looking to history, we can take slight comfort knowing that event-driven pullbacks are shorter on average than structural bear markets such as the Great Depression as well as expected cyclical patterns as shown in the chart below. If consensus projections are correct, our current event-driven sell off’s ramifications will be swift and severe, but relatively short-lived assuming there’s a coming “flattening of the curve” and barring any structural shifts in the economy. Millions of Americans will receive CARES Act stimulus checks in the coming weeks. Months of pent up demand will eventually show itself taking advantage of the Fed’s slashed interest rates and additional massive fiscal stimulus efforts around the globe. All these factors should provide for a robust bounce back in activity as Americans get back to work. At a portfolio level, we continually monitor and adjust positions as we navigate through the uncertainty. During the quarter, we made a number of moves as markets descended lower, and rebalanced portfolios in late March, the net result of which added to our equity exposure as the sell-off intensified and valuations became more attractive. As always, we will look for opportunities in the volatile months ahead as the market attempts to find its footing, seeking favorable risk/reward setups for those with a longer-term perspective.
CITATIONS: 1 – CNN.com, March 31, 2020. 2 – Reuters, March 31, 2020. 3 – MarketWatch, April 1, 2020. 4 – Investing.com, April 1, 2020. 5 – MarketWatch, April 1, 2020. 6 – CNN.com, April 1, 2020. 7 – MarketWatch, March 31, 2020. 8 – Bloomberg, March 13, 2020. 9 – CNBC.com, April 1, 2020. 10 – New York Times, April 2, 2020. 11 – New York Times, March 31, 2020. 12 – Barchart.com, March 31, 2020. 13 – MarketWatch.com, March 31, 2020. 14 – Barchart.com, April 2, 2020. 15 – BusinessInsider.com, April 2, 2020. 16 – FreddyMac.com, April 2, 2020. 17 – Bloomberg.com, March 31, 2020.
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