Despite a strong start to the year 2020, the tale of the quarter was one of creeping dread, as coronavirus news crowded out other headlines. The emergence of COVID-19 in the United States, as well as the subsequent measures to stem the spread of the virus, sparked a rapid deterioration in markets and the economy that has no clear parallel in history.
The depth and pace of the equity market decline, which culminated on March 23, were historic. The S&P 500 fell 34 percent from its February high in just 22 days. No equity investment style was immune to the selloff. The index was in bear market territory, defined as a peak-to-trough decline in stocks of 20 percent or more. The shift from a bull market to a bear market was the fastest ever, and the month of March proved to be the most volatile, up-and-down month for the S&P 500 in history.
The fiscal and monetary policy measures employed in response were swift and aggressive—and helped to stabilize markets toward quarter-end.
In late March, Congress approved the $2.2 trillion Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The package includes small business loans and debt forgiveness, assistance to distressed industries, particularly airlines, one-time cash payments to individuals, expanded unemployment benefits and $454 billion to the Federal Reserve to cover potential losses from its lending facilities.
In addition to cutting interest rates to zero, the Fed took additional steps to act as the lender of last resort and restarted several facilities used during the Global Financial Crisis. Although it is still early, these programs appear to be effective.
Of course, individuals’ health is of primary importance as the world continues to battle the effects of COVID-19. Of secondary, but great importance, is the impact of the pandemic on the world’s economies and markets. The second quarter will hopefully begin to point toward recovery of both social and economic well-being. The impact of the CARES Act should begin to be felt by individuals and businesses soon. Volatility is likely to remain elevated.
In the coming months, economic data and corporate earnings will begin to clarify and quantify the economic impact of COVID-19. Although economic indicators will reflect some of the weakest readings seen in history, markets are forward-looking and price action will eventually reflect post-COVID-19 growth expectations—well in advance of the economic data. At some point, we believe the S&P 500 will rebound on future growth expectations.
Since we cannot time markets, investors should stick to their long-term strategic allocations in anticipation of that rebound.
Notes: The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.