Since there have been so many developments in the capital markets over the past several weeks, we want to recap the most important developments that have been driving the performance of investment portfolios.
Let’s start with the basics: the COVID-19 pandemic has rapidly spread throughout the entire world, surprising the global capital markets with its severity and magnitude. It is a textbook example of a black-swan event. Nobody was aware of the novel coronavirus year ago; everybody is aware of it now. Attempts to control the spread of the virus have quickly resulted in widespread social distancing that will persist for an unknown period of time.
Stock markets responded dramatically to the pandemic. For example, the S&P 500 Index pulled back 33.5% from February 19 to March 23 (source: Morningstar).
The US Federal Reserve, Treasury, Congress and the Administration reacted with a kitchen-sink approach to combat its effect.
Legislators passed the CARES Act: $2.2 trillion of relief efforts including
- Direct payment to households,
- $500 billion to the Federal Reserve’s activities,
- $349 billion Small Business Administration program,
- $340 billion in emergency funding mostly for states and local governments, etc.
The Federal Reserve took several pages from its 2008 playbook.
- Lowered the target Fed Funds rate close to zero,
- Authorized securities purchases including Treasuries and mortgage-backed securities
- Up to $2.3 trillion loans to support households, employers, financial markets, and state and local governments
- Set up currency swap facilities with other central banks, etc.
The Fed is trying to ensure that credit continues to flow to households, businesses and the markets so the financial system doesn’t amplify the shock to the economy.
The combined fiscal, monetary, and financial activities helped the markets to reverse some of the damage caused by the quick downturn. The S&P 500 rallied 21.2% from March 23 to April 9 (source: Morningstar). While this has helped, the S&P 500 would still have to gain an additional 24.1% to get back to the highs in Feb.
This extreme drop and bounce has prompted many to predict a V-shaped recovery. After all, the world adapted quickly to the pandemic; it seems feasible that the economies could simply re-start when the time is right.
However, we should point out that restarting economic activity amid a healthcare crisis is probably a slower process than stopping economic activity. It’s not so much the monetary/fiscal response that’s going to be the critical element to restarting the economy, it’s going to be the public-health response.
Over the coming months we will begin to see a lot of data that compares the current environment to the Great Depression. For instance, Q2 GDP growth may contract at a projected annual rate of 25-30%, and unemployment will almost certainly hit double-digits.
Will the negative shocks be short-term and transient? How destructive will the pandemic ultimately be? The answers will be heavily determined by the length of time it takes to establish conditions where social distancing can be relaxed.
If current conditions last one quarter, the US economy could come back relatively quickly. If they last longer, then the destruction will be greater, possibly resulting in a U-shaped or W-shaped recovery.
The good news is, the entire stock of human ingenuity is working on solutions. Over time, we will overcome this crisis, the economy will recover, and the markets will reward different companies that are most relevant in the post-COVID-19 era.
We are here to make sure you have the right plans in place to accommodate a shorter- or longer-term recovery. Let’s all stay informed; and let us know how we can help you navigate the current markets.
This material is for informational purposes only, not intended to be relied upon as a forecast, research or investment advice, and is not an offer or solicitation for the sale or purchase of any security or other financial instrument or to adopt a particular investment strategy. All charts and graphs are shown for illustrative purposes only.
The opinions expressed are as of date reference herein and may change as subsequent conditions vary. Inception Financial Services does not undertake any obligation to update such information in any form or format. The opinions contained in this material do no constitute financial, legal, or tax advice, are derived from sources deemed to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Investors should consult their financial and tax professionals before implementing any strategy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
Investing involves risk, including the loss of principal. Past performance is not a guarantee or predictor of future results. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.
Investment advisory services offered through Alphastar Capital Management LLC, registered investment advisor. Alphastar Capital Management LLC does not offer legal or tax advice.