By Bill Hornbarger, Chief Investment Officer at Moneta (@MonetaCIO)
After a difficult March, equity markets stabilized and generally rallied during April, with most equity market segments posting double digit returns for the month. April provided welcome relief for investors who had been stunned by the severity and decline of the markets in the wake of the pandemic impact. In recent sessions, headlines have turned more negative with a historically bleak employment situation, inconsistency in terms of reopening timelines and strategies, and a contentious political climate in a presidential election year.
Equity markets have remained volatile and investors’ anxiety has remained elevated as they survey a landscape rocked by the impact of the coronavirus. And while every bear market is different due to cause, length and severity, we have experienced this before. From the Depression to the Tech Wreck and 9/11 to the Global Financial Crisis of 2007-2009, the U.S. economy has proven resilient and markets have recovered, despite a consistent chorus of commentators saying, “this time it’s different.” And while we don’t want to minimize the challenges in front of us and the tragic human consequences of the current situation, for investors willing to take a longer-term perspective we would point out that despite these challenges, history (and current activity) argue for guarded optimism.
Using history as a guide we would suggest that the path to economic (and market) recovery is a question of “when” and not “if.” That position is based on several factors:
- Massive fiscal and monetary policy stimulus programs – The Federal Reserve has responded aggressively to the market weakness dislocations and both the sudden and sharp deceleration in economic activity. The Fed quickly reduced the target Fed funds rate to 0%, launched asset purchase programs (quantitative easing) and targeted specific areas of the funding markets that were in distress. At the same time, multiple rounds of fiscal stimulus targeting both individuals and business were put in place, with the most recent being the record $2.2 trillion CARES Act. During the Global Financial Crisis of 2007-2009, it took months for fiscal stimulus packages to be enacted, while this time it happened within a matter of weeks.
- Interest rates (bond yields) and oil prices are low. In the case of the bond market, yields are at historically low levels. The benchmark ten-year Treasury has fallen below 1%, pushing borrowing rates for business and consumers lower also. Individuals can take advantage of low mortgage rates to buy or refinance a home. Businesses can borrow inexpensively to invest for future growth. At the same time low energy prices are a boon to the consumer.
- The U.S. Economy was in good shape entering the pandemic. Unemployment was near record low levels, corporate earnings were strong, inflation was moderate, financial conditions were relatively easy and the economy was growing at a steady, albeit unspectacular, pace. While these conditions have changed significantly and rapidly, as the economy gradually reopens there will be some pent-up demand from two plus months of shelter in place guidelines.
- The U.S. is a consumer-driven service economy that has been hit hard by recent events. However, where possible businesses have adapted. Most of us have become familiar with Zoom meetings, Microsoft Teams and where possible businesses have quickly adopted work-from-home protocols. Many restaurants, grocers and retailers offer curbside pick up and enhanced delivery services. At the same time, the very best and brightest minds in the fields of healthcare and science are working non-stop on treatments and a vaccine for COVID-19.
Investors with longer-term perspectives often find it helpful to think of the financial markets in terms of direction, degree and timing. History shows that over longer-term timeframes equities (as measured by the S&P 500) post positive returns in more than 70% of months (direction of growth) with an average annual return of 7%-9% (degree of growth). The third variable (timing) is a little more difficult to measure, but the accompanying exhibit shows how the market has rebounded from previous downturns.
One of the most difficult things to do as an investor is remain resistant to emotional decisions (both panic and euphoria). While none of us knows when the pandemic will end and what the reopening of the economy will look like, we do know that in previous recessions and bear markets, the markets have recovered and made new highs. While we expect the economic data to remain weak for the next several months, that is a “known” and investors are already beginning to look past that. While it’s possible that a second wave could hit, or the reopening may not go smoothly, we take some comfort in the fact that history shows us that maintaining that long-term perspective and staying invested has allowed investors to benefit.
Market Snapshot
Fixed Income
- Credit spreads narrowed amid accommodative monetary policy
- Inflation expectations rose modestly benefitting TIPS
Equities
- Fiscal and monetary policy response to the global pandemic
- Late April rally propelled small caps
- U.S. dollar strength weighed on international stocks
Real Assets
- Attractive valuations stirred interest in real estate and midstream energy
- Disinflationary pressures weighed on commodity prices
Financial Market Performance
© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials have been prepared for informational purposes only based on materials deemed reliable,
but the accuracy of which has not been verified. Past performance is not indicative of future returns. These materials do not constitute an offer or recommendation to buy or sell
securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before
making any investment decision.
