An Update on Markets
Post by Chamber Member Matt Henry
Since there's so much coverage of the disease itself in the news, we will keep this focused on the markets.
It's been rough out there.
It has. The increasing amount of algorithmic and computer-based trading has created much higher volatility during this market shock. The market has fallen faster in this drawdown than at almost any time before, but that doesn't mean it's been worse. The market fell 35% from February's peak to Monday's low. That number is important, because the average market drawdown historically is almost exactly 35%.
The very next day - yesterday - was the largest one-day rally in 87 years, with the Dow up 11%. Traders were anticipating that Congress would get its [unbelievably large] $2 Trillion stimulus package done, and they were correct. This is the third rescue package from Congress, and signs point to there being at least one more in the future.
Will the stimulus help?
We think it will. It's hard to overstate just how much money we're talking about here. First, imagine one million dollars. The image to the right shows what it looks like at the Chicago Fed's Money Museum. Now, imagine there are one million separate piles of one million dollars each. If they were 5 feet apart, it would stretch on for 947 miles. After all of that, now double it. That's $2 Trillion. That's over 10% of the entire US annual GDP.
Importantly, the stimulus will be much more effective than the Fed lowering rates to zero. Most of the new unemployment claims are in lower-paying jobs. These people don't need lower rates, they need cash. As such, the government is going to rain money down on households in an unprecedented way, with increases in unemployment benefits and direct checks to households. As long as people spend this money (rather than save it), it will pull the economy out of the coming recession.
What will that look like?
Unlike recent recessions that were caused by asset bubbles and global financial crises, this recession is caused by a pause in spending. Industries hit the hardest will be travel and leisure (airlines, hotels, theaters, casinos, etc.), restaurants, autos, and energy. This quarter's GDP will be decent, but second quarter will show a sharp contraction (prepare for mid-teens), followed by a flattening as people get back to normal life. Then, we expect a very sharp recovery due to pent-up demand. This U-shaped recession will be deep, but relatively short. Financially, this should be less damaging to the average household than previous recessions, which should make a quick recovery possible.
How will markets respond?
We expect the stock market to lead the recovery by 3-6 months. Best case scenario, this may have already started. With history as our guide, selling now looks like it would be a mistake. The market has recovered from every past recession, and buying stocks has been most profitable when investors are fearful. If you have a time horizon longer than 12-18 months, rebalancing your portfolio and adding to equities (if needed) will likely be a good long-term investment.
Bonds have behaved very strangely in this market, with municipal bonds, higher quality corporate bonds, and even Treasury bonds all selling off. This is very rare, as investors generally flock to bonds for short-term safety. This time, the lack of liquidity in bond markets led traders to sell everything to cash. The Fed has announced 'unlimited' liquidity support, and markets are starting to normalize. While we do expect some companies to default in the next few months, there are plenty of opportunities in bonds, especially in high-quality companies and well-financed municipalities.
If you'd like us to take a look at your portfolios and position them accordingly, let us know.
Finally, a helpful security reminder from the Kiplinger Letter:
"Beware coronavirus scams in calls, texts, e-mails or social media posts. Hackers are trying to lure victims to click on COVID-19-related hyperlinks that contain malicious software. Some scams attempt to look like official messages from the government and link to fake websites to steal usernames and passwords. For official info, go directly to trusted government sources, such as www.cdc.gov. Vet charities and online sellers closely, as fakes are popping up and stealing money. The scammers are already out in full force. Expect it to grow much worse.
"Also look out for scams when it comes to the government sending checks. The government will not ask you to pay anything up front to get this money. It won’t call and ask for Social Security and bank account numbers, or credit card info. Anyone who tells you about a check now is a scammer. Report scams at www.ftc.gov/complaint. Fraudsters have clever tactics and will fool many people."
Matt Henry, CFA
Vice President, Senior Investment Officer
3610 River Crossing Parkway
Indianapolis, Indiana 46240
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