By Todd Bogda
Before breaking down the market moving events of the first quarter, I would like to express my wishes that you and your loved ones are safe and managing the current situation as well as possible. We are all quite literally in this together, albeit with varying degrees of stress and hardship. I hope and have faith that this will pass soon and that the return to normalcy will assuage the burdens caused by the pandemic.
While it appears that we have been successful at flattening the infection curve of the COVID-19 virus, it is the economic demand curve that we will contend with when the lockdown ends. The economic damage is certain, but the path, and perhaps more paramount, the pace of the recovery, are yet to be realized. The deterioration of financial conditions has been unsurprisingly violent given the nature of the stay at home lockdown affecting most states. In five weeks, 26 million Americans have lost their jobs, wiping out all of the jobs gained since 2008. Over the course of 22 days, the S&P 500 Stock Index fell 30%: an ominous new record. By comparison, it took 250 days for the same pullback to be completed during the Global Financial Crisis (GFC) in 2008. While these statistics are daunting, it stands to reason that the sooner we reopen the economy the brisker the pace of hiring, the steeper the demand curve, and the stronger the recovery will follow.
Liquidity driven selling in financial markets like the kind witnessed in March is nothing new, but the severity of the dislocation was in some metrics worse than during the GFC. The global debt of $255 trillion is 40% higher than at the onset of the GFC and represents 325% of global GDP. This debt load created a rush to raise cash to pay down debt, secure loans, and lower risk, ahead of expected declines in cash flow and revenues. In the face of this pivot by businesses from trying to earn a profit to trying to survive, the Federal Reserve stepped in with dynamic measures including: slashing overnight borrowing rates from 1.5% to 0%, backstopping money market funds, direct lending to municipal governments, and facilitating loans through the Paycheck Protection Program (PPP) by direct lending to banks, among other programs funded through the CARES Act. All told, this $2.6 trillion stimulus represents $20,000 in government spending per US household (a total of 128 million households). These aggressive supportive actions have stabilized bond and stock markets since the March lows, leading to recovery of half of the market’s losses since the pandemic unfolded.
As we sit tight and wait for the “all clear” to start back to a new normal, markets have begun to take a breather. At this point, investors, corporations, and government leaders are trying to gain visibility into the path of the economic recovery as many corporations have removed forward earnings guidance due to extreme uncertainty. In light of this, we remain cautious and continue to monitor events daily.
Work from home, self-quarantine, social distancing, and flatten the curve are all now fully ingrained in our daily lexicon. Although we cannot see around the curve ahead, we are applying the brakes and will take it slow.
Todd is a Financial Advisor at Stonebridge Financial Group. His focus is providing exceptional service to individuals, families, and institutional clients, implementing investment portfolios and asset allocation techniques in an effort to achieve client-specific investment goals.