Our Perspective: An Update On The Effects Of COVID-19

The global health crisis of COVID-19 is disrupting life as we know it. The markets are responding. And all of us are barraged by frequently-changing news headlines and fast-paced announcements.

In this post, we share our perspective on some of the most salient economic- and investment-related developments over the last few days so that you can make better sense of where things are and where we think they might be going.

Recent Developments

On Sunday, the Federal Reserve cut its rate to near-zero (0.00-0.25%) and pledged to buy “at least” $700 billion in Treasury and mortgage-backed securities.
- This combination of actions clearly demonstrates the Fed’s intent “to use its full range of tools to support the flow of credit to households and businesses…” affected by the market’s volatile reaction to the spread of COVID-19 throughout the globe.
  - Reducing rates will be helpful to the economy in the long-term.
  - Buying $700 billion of securities will help provide immediate liquidity.
On Monday, global stocks tumbled again, and losses accelerated within 5 minutes of the close as the Trump administration announced new guidance to help mitigate the spread of the virus that causes COVID-19.
Yesterday, Treasury Secretary Mnuchin disclosed that the Trump administration supports $850 billion – $1 trillion in various fiscal stimulus measures, and the Federal Reserve announced it would be ramping up its short-term lending facilities.
- U.S. equities responded positively, with the S&P 500 gaining 6.00% for the day.
Today is likely to start as a down day as extreme ups and downs will probably continue.

Our Perspective

Our view remains consistent with that of many leading economists: The duration and depth of the financial slowdown will depend on a combination of the policy response from governments and central banks, public/investor sentiment, and the success of current virus mitigation methods.
- Based on current virus mitigation efforts across the country, we foresee a substantial decline in second-quarter U.S. GDP and the inevitability of a recession.
- We also believe that the economy could begin to recover after the pandemic has run its course, in Q3 or Q4 of this year.
Major economic stimulus (i.e., 1-2% of GDP) likely is needed to cushion the economy adequately.
- The goal would be to broadly help support businesses (in addition to the airlines) that will be especially hard-hit by the cessation of normal economic activity and to help provide some assurance to businesses (particularly smaller firms), workers, and households, that they can withstand the economic effects induced by the global health pandemic.
- The specific amount of aid proposed ($850 billion) is just shy of 4% of 2019’s GDP total, which is significant.
  If this fiscal package is written in a targeted manner and enacted in a timely fashion, it could materially help the U.S. economy and individual households. However, it may take some time for the effects to appear.
- Fiscal stimulus will help blunt the economic fallout, but it will almost certainly fall short of stopping a recession. The storm will pass, however, and when it does, a recovery will begin.
It is unclear when specifically the negative economic effects of COVID-19 will end. Based on what we know right now, we think a recovery could begin as early as Q3 or Q4 after the steep decline in GDP that is widely expected for Q2.
As long-term investors, we focus on normalized valuations for a better indication of what future years could bring.
- Most major equity markets are down near 30%, and valuations are much better when looking forward to 2021 (e.g., the S&P 500 is trading at approximately 13-14x its 2021 P/E ratio vs. the trailing 25-year average of 16.3x).
Markets are still processing the potential economic impact of evolving social and health restrictions here and abroad in real-time, and they are often trading by pricing in the worst-case scenario. This is typically what happens.
- There have been 24 S&P 500 bear markets since 1929, or once every 3-4 years. On average, the drawdown has been 34% and it has taken approximately 2 years to get back to break even.
- Your portfolio is diversified, so history is a guide that you should experience less of a drawdown so it should take a shorter time period to recover.
It is important to recall during these tumultuous times that, unlike 2008-09, there does not appear to be a systemic threat to the global financial system.
- In contrast to 2008, banks are extremely well-capitalized.
- The Federal Reserve has a well-worn playbook from the Global Financial Crisis that it can act on efficiently and decisively. In fact, we have already seen it deploy some of the plays. Experience from 2008 should enable the financial system to continue to function smoothly and help to limit the downside risk.
During this time, we continue to keep a watchful eye on client portfolios. We are looking for investment opportunities that market volatility creates such as rebalancing your portfolio and/or tax-loss harvesting.

We hope that this summation helps you sort through recent headlines and announcements. Although we, too, are finding new routines and adjusting to changes in plans and daily life, we remain confident that our investment strategy for you is resilient.

During times such as this, connection and perspective are important. Please feel free to reach out to us at any time.

Insights: COVID-19 Uncertainties Ratte Investors and Fuel Psychological and Market Volatility

Our Perspective: An Update On The Markets

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