In Q1 of 2020, the novel coronavirus, aka COVID-19, began to spread rapidly around the world. Due to social distancing requirements and widespread shutdowns of businesses, a bear market and recession rapidly began. Though they have since recovered some ground, global stocks finished Q1 down 22%, and down 24% from the February peak. U.S. bonds gained 3% in Q1, driven primarily by longer-term Treasuries, while many parts of the bond market lost value. So, with all of this volatility and uncertainty, let’s take a look back at the last couple of months and address how coronavirus affected the stock market.
Coronavirus Uncertainty Created Volatility in the Stock Market
The last month has provided a new perspective on life and reminded all of us what is important. Bear markets are stressful, and right now is uniquely so because of the challenges facing the world and the impacts to our daily lives.
Two key themes surfaced as we wrote this. The first is uncertainty. There is more of it than at any time since at least the Cuban Missile Crisis. The coronavirus pandemic is evolving quickly and questions about the future of the economy and how our daily lives might be permanently impacted abound. Uncertainty creates volatility and fear. Capital markets do a reasonably good job of quickly pricing in what is known, but they are not perfect at this and they do not know the future. They tend to overshoot in both directions.
We must be prepared for continued volatility. Please note that accepting uncertainty is not the same as not having a plan. We move forward with the view that capitalism and free markets will persist and the fundamental principles of investing still apply.
Coronavirus Will Be Costly, But Stay Focused on the Long-Term
This ties into the second theme which is the importance of time. While uncertainty dominates the short-term, historically its long-term impact is blunted. The coronavirus will have an awful cost, but it will be defeated. Whether it takes a year or three, we believe growth will resume. For long-term investment portfolios, we urge people to think in that context. Watching daily market moves and pondering exactly where stocks may find a bottom does little more than create anxiety. Bear markets can impair retirement goals which may ultimately require adjustments, but often not to the degree many people fear.
The recent uncertainty in the markets can be incredibly scary and lead people to make knee-jerk reactions that might compromise their long-term goals. We’ve always believed one of the most important ways we add value to our clients is by removing emotion from investment decisions and being there for support, in good times and in bad. We wish you the best in the difficult months ahead and are here to help. We’ve been in communication with the majority of clients in recent weeks, and given the nature of our organization, all our advisors are fully equipped to do their jobs and be available while temporarily working from home.
What Will Happen Next in Capital Markets?
Stock market direction this year will mostly depend on how long and to what degree coronavirus social distancing continues. This is the main factor causing job loss and slowing the economy. Shutdowns are in place for good reason, but it will not be feasible to maintain them indefinitely. The longer they last, the more economic damage there will be. Countries will find creative approaches to return, but the scope and timing is impossible to know at this point.
Five years from now, we believe equity prices are very likely to be higher than today. While stocks rise most of the time, given the scope of current uncertainties, we think it makes sense to assume roughly equal chances that equities are up or down in Q2 and for the rest of 2020.
Heightened volatility is likely to remain for some time, though we suspect many are letting their imaginations fuel unlikely probabilities of future outcomes. Government monetary and fiscal support will help but can’t sustain a continued shutdown. In the Great Depression the government tightened monetary policy.
Right now, the massive stimulus package is appropriate, though there will be a price to pay down the road. Bank balance sheets appear solid for now, but this will be tested as more companies and individuals start to default. Unemployment will likely land somewhere between 12% and 20% by the end of Q2, noticeably worse than the 2008 recession. We remain optimistic that jobs will return somewhat faster than in 2008, but the economy won’t just snap back to where it was.
