Epidemics and Stock Market Performance

Our firm is busy monitoring the current market conditions, events and client accounts.  Here is a brief overview of recent events:

Last week was one for the history books. Tuesday: the highest percentage gain for the Dow since 1933.  Thursday: record new unemployment benefit claims of 3.3 million—doubling some estimates. In the end, the Dow finished the week in the green.

• The Federal Reserve raised its response to the coronavirus crisis to a whole new level, with its open-ended QE as well as unprecedented purchases of short-dated IG corporate debt and ETFs, measures that had not been adopted even at the height of the global financial crisis.
• The decision to purchase ETFs expands the purchase of IG debt to longer maturities. Together, these measures show that the Fed understands the need for a creative, decisive and adaptive strategy to fight the current crisis.
• The Fed announced a raft of new measures and facilities aimed at: 1) providing targeted relief to affected households and businesses; 2) giving broad support to economic activity; and 3) ensuring the smooth functioning of money and credit markets. These include:
  • Open-ended QE. It announced it will purchase Treasuries and agency MBS “in the amounts needed” to keep markets functioning smoothly and ensuring monetary policy can do its job.
  • New facilities to support credit to households and businesses with up to $300 billion in new financing.
  • Expansion of
    [liquidity facilities] to a wider range of securities.
  • Planned launch of a program to support lending to small- and medium-sized businesses.
• We think the Fed’s support can help the US economy survive the shock and set the stage for a strong recovery in the second half of the year, on two conditions:
  • One: the government-mandated shutdown of large parts of the economy is sufficiently short-lived. 
  • Two: Congress follows suit and launches a sizable package of fiscal measures, and remains committed to implementing all measures that may be needed to weather this exogenous shock.
• Update as of 3/27 – Congress negotiated a $2 trillion relief bill this week, the largest stimulus package in US history, that has now passed the House and Senate—and was signed by the President into law.

Market updates:

• In terms of where the markets go from here, our base case is U-shaped recovery; likely with some significant ups and downs during this phase. A quick V-shaped recovery seems unlikely barring an antiviral breakthrough.
• The delay in rebound is because the demand shock should lead to business and household stress that, in turn, leads to higher unemployment and defaults. This puts “stickier” downward pressure on aggregate demand in the recovery phase. On the positive side, our base case is that we experience the worst of the virus before the second quarter of 2020 is over.
• As we’ve often discussed, we recognize that while we can’t control returns, we certainly can control risks. Even in these uncertain times, we seek to build well-diversified, low-cost portfolios.