Market Update for March 20, 2020
3.20.2020 Market Update
We’ve spoken with many of you in recent weeks and felt it best to follow-up with another email as we navigate this together. These are unprecedented times, beyond the market volatility, and we are all experiencing the stress and impact as each day unfolds. We want you to stay informed and reassure you that we are prepared. We are alert in monitoring the markets and your accounts and will respond appropriately and quickly when it serves best for our clients.
Market Insights from Betsy Pierson, CFA, Chief Investment Officer, John Culhane, CFA, Director of Fixed Income and Sr. Portfolio Manager, and Tracey Garst, Sr. Portfolio Manager:
As Covid-19 continues its spread through the U.S., Europe and the rest of the world, we want to reach out to everyone and provide an update and share our thoughts. The level of volatility in the equity markets has exceeded those levels last experienced during the 2008-2009 Global Financial Crisis. It has been unsettling to many but this too shall pass; but when is the question in most minds. There have been extensive actions taken by the Federal Reserve (‘Fed’) and Congress and more may be needed.
The Fed has taken several quick and extreme actions to provide liquidity in the markets. We have not seen this type of central bank action since the Global Financial Crisis. The credit markets had seized up and without credit flow, financial markets will struggle and liquidity dries up. The Fed made quick work to lower the overnight lending rate to 0%, encouraged the use of the Discount Window to provide liquidity, worked with other central banks to coordinate a quantitative easing program, provided liquidity through U.S. dollar swap arrangements, provided backing for commercial paper as well as prime money market funds and just today, added purchases of short-term quality munis to provide liquidity to the market. We applaud the Fed for taking these actions and not hesitating in making these moves. These are unprecedented times which require unprecedented actions.
At a government level, crisis mode has finally arrived and Congress has been working to prepare several fiscal stimulus packages to aid small businesses as well as individuals impacted by this pandemic. The first package passed and signed by the President was just the tip of the iceberg. A more impactful package helping individuals, as well as businesses negatively impacted, is working its way through the House and Senate. Our view is that this needs to be completed sooner rather than later. We do believe that the level of unemployment claims in the next couple of weeks will be dramatically higher (even in the millions) as the economy is basically shut down. We are a service economy and limiting contact by closing restaurants, stores, casinos, etc. leaves many unemployed for the duration of this emergency situation.
As we work through this pandemic, there will continue to be increasingly negative news regarding the number of new reported virus cases. We have just begun testing. If China and South Korea are any indication, the U.S. won’t hit a peak in new cases for two to three weeks. By limiting contact and social distancing, this should aid in the escalation three to four weeks out enabling a plateau and deceleration in reported cases. When we reach that level, the economy will begin to function again at differing levels. According to several sources within China, after closing down the economy for about 4 weeks in January, its economy is now beginning to function close to 100% again.
Domestic equity markets have declined from the all-time highs in February, reaching cycle lows on Wednesday, before bouncing back up on Thursday. At midday Friday, the market continues to be volatile swinging from positive to negative. The uncertainty surrounding earnings and business viability makes it difficult to determine where valuations should be on stocks leading to continued volatility. The Dow Industrials have seen more 1,000 point swings in a row than ever experienced in a 7 trading day time frame. We may not have seen a bottom in the markets yet, but perhaps the leveraged trades, short trades, and margin calls have been leaving a more normal market environment. For the near term, negative news will continue regarding the number of new cases and thus leading to continued volatility. The actions taken by the Fed as well as any fiscal stimulus provided by the government will aid in confidence. While it is painful at the time, this excess liquidity and stimulus should benefit both the economy and equity market when the corner is turned on this emergency situation.
We continue to maintain our positions in our portfolios. As we closely monitor the markets, we do think there will be a time to leg back in and increase our equity positions. The economy was in a strong position leading up to this government-forced economic shutdown which we believe will result in a short recession. When the world returns to a more normal pattern in 2 to 3 months, there will be pent-up demand, businesses that remain in business will rehire employees and economic growth should rebound. Typically, the equity markets begin to move higher as it anticipates the recovery. This may be when newly reported cases hit a peak and begin to decline on a daily basis.
Please feel secure in knowing that we are here to help. We remain vigilant and maintain our commitment to providing you with the services and support you need. We are still accessible and equipped to handle all aspects of portfolio management, financial planning and brokerage services, despite the recent shift to work remotely, so please do not hesitate to reach us by phone or email.
We appreciate your patience and understanding during this challenging time. You and your loved ones remain in our thoughts and we hope you stay safe and healthy.
Thank you for your continued trust and confidence in us,
Midland Wealth Management