Linda S. Parenti, CFA
Chief Investment Strategist
The stock and bond markets continue to ride on the COVID-19 coronavirus roller coaster that started this year. While the recoveries continue to rise in China, news of an increasing spread of cases in other countries has worsened. Prevention and containment efforts here and abroad, from border closings to event cancelations, are lowering estimates for global economic growth. The recent drop in the price of oil following Russia’s refusal to lower output and Saudi Arabia’s subsequent declaration they too would raise output is also negatively impacting economic growth estimates. Lower energy prices are helpful to the global economy overall, but now that the U.S. is the world’s largest producer of oil and a net exporter, our short term hit to oil industry related earnings and employment is significant. Expectations for lower or negative growth from corporate earnings has consequently been driving down stock prices. Yesterday’s sharp decline brought the S&P 500 equity index into bear market territory, officially ending the 11-year bull market run.
What happens now? Although economic data is mostly backward-looking, it had been healthy. February’s employment report was exceptionally strong. Housing related data has also been on an uptrend thanks to lower interest rates. Fourth quarter corporate earnings growth has been modestly positive as well. Going forward, we should expect weakness from reduced demand within numerous industries in the months ahead. Still, it may be helpful to remember that the economy was on sound footing prior to the COVID-19 outbreak. This is a public health crisis, not a financial crisis such as what we experienced in 2008. Banks are well-capitalized and in much better shape now. The Federal Reserve is taking preemptive monetary measures in order to maintain a well-functioning financial system. Congress and the White House are actively working on adding fiscal support. No one knows the extent to which earnings and economic growth will be damaged from COVID-19. Therefore, estimates are convincingly pricing in dire scenarios. However, even if we see several recessionary quarters, the world will recover from COVID-19. Economic growth should then pick up again, likely during the second half of the year.
Ironically, Monday was the 11-year anniversary of the current bull market. The total return of the S&P 500 over that 11-year period was 16.8% annualized. However, if during those 2,768 trading days you missed just 20 of the best days, your annualized return would have been reduced by half. Studies show that the best days for the stock market typically happen shortly after the worst days. Market falloffs and rallies happen quickly due to instant news flow and automated trading programs, so timing them is highly risky. Our approach has been to trim profitable holdings and regularly rebalance your portfolio’s asset allocations during good times, so we have a buffer of cash and fixed income to ride through the challenging times.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.