The markets continue to focus on the coronavirus (Covid-19) as indexes around the globe declined sharply. The S&P 500 had one of its worst weeks since 2008 (-15.0%) and is now down -29.3% YTD. From the all-time closing high of 3,386 on February 19th, the S&P 500 is down -32.0% from peak-to-trough (closed at 2,304 on Friday March 20th). Just two weeks ago (Thursday March 12th, 2020) marked the single biggest decline in the Dow Jones Industrial Average since the October 19th, 1987 crash of -22.6% (by comparison, the Dow was only down -10.0% on March 12th). Monday March 16th set a new record with a decline of -12.0% in a single day. To say the very least, equity markets have been extremely volatile.
Equities are not the only asset class getting rattled. The Federal Reserve cut interest rates to 0% on the evening of Sunday March 15th and announced $700 billion in quantitative easing. These are measures not seen since the Great Financial Crisis of 2007 – 2009. Just two weeks ago, the entire 30-year Treasury curve was below 1.0%. Rates have moved dramatically week-to-week with the 10-year as low as 0.54% on March 9th but as high as 1.18% just nine days later on March 18th (currently trading at 0.92%). Credit spreads widened and some bond market liquidity has dried up. The Fed is likely to inject more liquidity into the system.
In a few short weeks, life as we know it changed across the globe. The CDC recommended that “for the next 8 weeks, organizers (whether groups or individuals) cancel or postpone in-person events that consist of 50 people or more throughout the United States”. The NBA, NHL, NCAA, and many others have postponed or cancelled seasons entirely. Schools closed. President Trump imposed travel bans on European countries and the borders between US and Mexico are closed to nonessential travel. Spain, France, and Italy imposed nationwide quarantines. Governors and Mayors are imposing bans on restaurants and bars. These actions are intended to slow the highly contagious Covid-19 which had over 316,000 worldwide cases and over 27,000 in the U.S. as of March 22nd. All of these cancellations and changes in consumer behavior will have serious economic consequences. Two weeks ago, the House passed the coronavirus relief bill and promised free testing for all. The current Secretary of the Treasury, Steve Mnuchin, knows that current aid has not been enough and has urged Congress to pass a larger stimulus package. It is likely that a package will be passed this week and some estimates have it topping $2 trillion with plans to send checks directly to families to keep the economy afloat. These would be unprecedented moves.
Many economists are predicting a recession at some point in 2020 and others are optimistic that the economy will bounce back in the second half of the year. We do not know how long the outbreak will last, and health officials are warning that it is likely to get worse before it gets better. The economic data will not be pretty and this hit on the economy could last weeks or months.
Although the short-term outlook is grim, we should not lose sight of what we know in the long run: each day, millions of Americans will continue to get up and go to work (for many people over the next several weeks that may mean waking up and walking down the hallway). People will continue to innovate and look for ways to improve their lives and the lives of others. Over the past 10 years, the annualized return for the S&P 500 is +9.4%. If you believed in the long-term success of entrepreneurs and companies over the past 10 years, you were rewarded (even after accounting for the recent market decline). Investors have endured several crises in the past two decades: Dotcom Bubble, 9/11, and the Great Financial Crisis. Just like all these other events, this too shall pass. People and businesses have an incredible way of coming together when it matters most.
IMPORTANT DISCLOSURE INFORMATION
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