Author: Marty Moore, CFP®
CURRENT VIEW OF COVID-19 AND THE FINANCIAL MARKETS
While we are far from out of the woods, it appears that the spread of Coronavirus will not reach a worst-case scenario. If recent trends follow and the experts are right, our country will experience far fewer severe illnesses and deaths than what was being considered possible just a couple of weeks ago. That’s fantastic news, of course.
In my last update two weeks ago (April 1) the S&P 500 had rallied about 10% off the March 23rd low point. Since that time the market has moved up another 15% and is now down (just) 12.2% for 2020. This has been quite a rally after being down about 32% just a few weeks ago. (Source: Morningstar, Inc.)
And while recent developments have been encouraging, it’s important to recognize that there may very well be setbacks when it comes to dealing with COVID-19, especially when states begin relaxing social distancing measures. A fair amount of uncertainty hangs over us still.
Attention is now turning to plans for opening up America’s businesses again. This too is a very good thing. Two weeks ago few people would have suggested that we would be entering into this discussion this soon.
Early indications are that there will be coordination among the states as to how and when this might be done. Coordination in this effort is also a good thing. A contest pitting states against each other in a race to open up “first” would not just present a hazard in doing all that is necessary to control the virus but it would not be good for the financial markets in my opinion.
While hopefully the fear and uncertainty over the spread of COVID-19 has been tempered of late we cannot say the same about the economy, and the financial markets. The economic and financial effects of shutting down a large swath of American life, from schools to sports to businesses of all shapes and sizes will only become known in the coming months.
I wouldn’t disagree with many comments being made at this time that the ultimate economic effect of placing our economy in a self-induced coma may be worse than the Great Depression. It’s certainly possible.
However, unlike the Great Depression, and the global financial crisis of 2008, the current crisis is not a financial crisis. It is due to a deadly and rapidly spreading virus that seemingly overnight was upon us.
In addition, the government’s rescue and stimulus plan response to the current crisis is very different, almost opposite in many respects, to the government’s actions during the depression. The debate about whether it is the appropriate response and whether it will be effective as intended will continue for the foreseeable future. It had to be done though. Doing nothing would have been disastrous.
So, what might the crystal ball be indicating for the period ahead? If it were a weather forecast it might say: mostly cloudy with a few days of beautiful sunshine intermixed with deep dark clouds and heavy rains. Which is to say: like COVID-19, a fair amount of uncertainty stands over the financial markets as well.
The recent strong move up in the market is likely due to an improving and possibly better than expected progress on dealing with Coronavirus. Assuming this progress is maintained, the attention will now turn more to the economy. Few people would argue that we won’t, at some point, return to normal life. The big question now is how long will it take and what amount of economic pain will we have to endure? We don’t know, of course, and it’s really a question that is unknowable. The current crisis is truly unprecedented. We have no historical guide.
I’m sure the ultimate level of unemployment will be staggering. No one is predicting less than 10%; most predictions coming in at 15%-20% at least. What will be interesting (to say the least) is to see how the drop in corporate profitability plays out over the coming months. While a high unemployment rate is expected and will not likely shock the financial markets, an extreme and worse than expected drop in profits could move the market back down.
Of course, the opposite could happen too. Profits may not take as much of a hit as expected. Large companies are typically very good at adapting and retooling and adjusting quickly to changes in the marketplace. Small businesses may bounce back quicker too. The rescue and stimulus plan could have a significant positive affect in each of these areas.
This is where I currently stand: The bending of the curve and the recent good news dealing with COVID-19 has been very encouraging to me. The recent market rally, not just cutting losses in such a significant way, but also the signal that investors know our economy and, more importantly, our way of life will return to normal at some point. Our habits, our work environment, and our economy may look different in particular ways but our current situation and the environment we’re in is temporary.
Patience is still the order of the day, both in how we conduct our daily lives as we anticipate getting back to work and being able to move freely about again, and in how we manage our money. We have to expect continued big daily swings in the market as any bit of good or bad news receives strong reaction in the financial markets. I think that’s just the way it’s going to be for a while.
I mentioned the light at the end of the tunnel a few weeks ago. I’m not really sure that’s what I see ahead now but it might just be.
As always, thanks for reading.
If you know me well, you know how I love charts and graphs. This one recently printed in the Charlotte Ledger was particularly spot on.
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