I wanted to write a note to you about the tremendous first quarter market volatility and the 20% S&P 500 Index decline. This “waterfall” decline was the worst since the 2008 Great Recession and was particularly unusual since the market was trading at an all-time high on Feb. 19. The COVID-19 pandemic is an unprecedented event elevating fear and uncertainty, but it is a transitory event for the markets and the U.S. economy. Meanwhile, we hope you please practice social distancing and stay safe.
The pandemic caused investors to sell equity holdings since corporate revenues and earnings will contract in the short term. Government mandated measures to stop the pandemic from spreading are deterring economic growth globally, but social distancing seems to be the only means of minimizing the contagion. While efforts such as “stay-at-home” orders are mitigating the virus’s spread, the concern is the accelerating unemployment rate. The federal government’s $2-trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act will serve to temporarily provide funds to the unemployed, the healthcare industry and the small business community. There may be even further federal response with more stimulus over the next few weeks.
The credit markets became volatile because lower quality bonds suddenly had no secondary market or liquidity. In response, the Federal Reserve has added non-traditional mortgage backed bonds, corporate bonds and municipal bonds to their ballooning balance sheet. This is to keep default rates for these entities from rising and keep citizens from recessionary conditions. The flat yield curve and low interest rate environment signals a slow or no-growth economy, with short-term deflation in energy prices, materials and real estate.
The equity market will continue to have large daily swings, with the defensive sectors like healthcare, staples, utilities and technology performing the best. The financial, energy, material and industrial sectors have declined the most during this market sell-off. Crude oil prices collapsed to $20 per barrel due to the Russia-Saudi production dispute and reduced demand as global transportation declined.
Since we have never had a pandemic this contagious or lethal in the U.S., the uncertainty and volatility of the markets will continue in the short term. The war against a virus can and will be won since immense efforts to developing a vaccine are under way. The global healthcare system is becoming overwhelmed, but vaccines are being developed and tested and production time will escalate quickly. When the dramatic escalation in the U.S. infection curve begins to slow or “flatten,” the equity market will anticipate a normalizing economy and move higher. With the lowest energy prices and the lowest interest rates the U.S. has had in years, as well as the federal government’s stimulus program, the economy will normalize and accelerate quickly.
The Trust Team is practicing social distancing guidelines and not scheduling face-to-face meetings, but we will look forward to talking to you by phone.
Please stay healthy.