Market Update – March 22, 2020

We want you to know we are committed to providing transparent, timely communication and are available anytime to discuss your situation during the evolving coronavirus crisis. Please call us if you have questions; we are here to support you. Please take care of yourself and your loved ones. We will get through this, together. Our market commentary is below. Please review additional resources at the end of this update.

Unprecedented times continue to place stress on financial markets. The S&P 500 Index closed down nearly 15% for the week ended March 20, while the Dow Jones Industrial Average closed down more than 17% for the same period. Bond and gold prices also fell, as some investors turned to cash as their safe haven.

The Federal Reserve cut short-term interest rates to their lower bound this past week, and vowed to inject liquidity into Treasury, mortgage, and money markets. After passing a first coronavirus relief bill that was signed by President Trump, the U.S. Congress continued work on a follow-up bill to provide additional aid. Special attention is necessary to assist small business owners and employees most directly affected by government shutdown directives.

Stock markets continued to price in expectations for severely negative economic growth in the coming quarters, as corporate earnings will no doubt suffer severely from our collective quarantine efforts to curb the pandemic. We are almost certainly in the midst of a recession; only the severity remains to be seen. Since 1980, we have experienced five recessions – lasting anywhere from 6 to 18 months each time.

According to Goldman Sachs Global Investment Research, recessions are typically accompanied by stock bear markets that fall into one of three categories:

Cyclical

• Accompanying the end of the business cycle, stock losses average 30% and take 26 months on average to regain lost ground.

Structural

• Systemic issues cause this type of recession (e.g. dot-com bust), where stock losses average 57% and take an average of 42 months to recover.

Event-driven

• Caused by a one-off shock, the average loss is 26% while taking an average of 7 months to recover.

Although the current bear market can be classified as event-driven, the risk of it morphing into a structural issue cannot be dismissed. That chance
increases the longer the economic contraction lasts due to the forced closing of businesses. However, our base case is still to expect a recovery once the virus is brought under control. Easing worldwide monetary policy, combined with favorable U.S. regulatory environment and corporate tax rates, will likely help the economy regain momentum swiftly as pent-up consumer demand is released. Downside risk rises if businesses are forced to remain closed longer than expected. In this light, we encourage you to contact us to discuss any short- or intermediate-term cash needs.

We’ve overcome challenging times as a nation, and the road to recovery will be a joint effort between government and citizens. Government coordination of medical, monetary, and fiscal policies – paired with the dedicated efforts of millions of Americans – will jointly defeat the current threat. We continue to monitor the situation daily, looking at both downside risk and upside opportunity. Again, please contact us at any point. For the safety of our valued clients and wonderful team members, we are available via phone, email or video conferencing.

Nathan Mersereau recently appeared on “Flashpoint” an NBC affiliate WDIV to discuss the state of the financial markets with journalist Devin Scillian.
Click here to watch the interview.