Stocks displayed slightly less volatility last week, as the S&P 500 ended down -2.1% and the Dow Jones Industrial Average finished down -2.7%. Both indices began the week on a positive note, only to pull back by the close of trading on Friday. As the first quarter ended, the S&P 500 and Dow had dropped 20% and 23.2% respectively.
Unemployment claims rose dramatically higher last week, with more than 6.6 million Americans filing for first-time benefits. Combined with the previous week’s figure, nearly 10 million workers have now filed claims as a result of the COVID-19 health crisis. This number is expected to grow as the shutdown and social-distancing efforts continue. The recently passed CARES Act will help provide some relief, but additional government assistance will likely be necessary as more jobs are lost.
Markets are pricing in a significant recession to set in over the next several months. Some analysts predict an 80% drop in corporate profits and double-digit negative GDP growth during the second quarter. While the full scope of the recession will continue to be uncertain until the crisis is brought under control, the recovery will likely take one of four paths:
- V-shaped: The virus is brought under control in the next month or two. A snapback commences and a sharp recovery brings us back quickly to where the economy was pre-virus.
- U-shaped: The virus continues to cause major disruptions for several more months, leading to a slightly longer bottoming process. A recovery commences, but is tentative at first as demand for goods and services takes longer to return to the prior highs.
- L-shaped: The acute crisis continues for several quarters and stubbornly refuses to be brought to heel. Businesses continue to be shut down and citizens quarantined, leading to bankruptcies and further hardship. Economic output suffers long-term, as stagnation sets in.
- Square-root shaped: The virus is brought under control in the next month or two and the economy recovers some of its past strength. However, the pace of growth is not large enough to bring the economy back to pre-virus levels, and a lower steady-state growth rate ensues.
The ultimate shape of recovery will be determined by a wide variety of factors and we continue to closely monitor conditions. The old adage, “It’s tough to make predictions, especially about the future” has never seemed more accurate.
As the medical and economic responses to the virus continues to evolve, please contact us with any questions during this trying time. As always, we’re here to support you in any way possible to keep your financial plan on track.