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Rethinking the word UNPRECEDENTED

By Nancy Johnshoy, CFA

The meaning of the word “unprecedented” is “something never done or known before.” By definition, that should be a rarely utilized word although it seems these days that you can’t avoid it. A quick internet search of the term “unprecedented times” since January 1 shows 12,100,000 results. Unlike some other overused phrases like “breaking news,” I do think that this may, in fact, be the most appropriate adjective for what has occurred in the United States and across the globe in 2020. Coronavirus has infected more than 6.4 million people worldwide and almost 1.9 million in the United States. Efforts to flatten the curve brought economic activity worldwide to its knees in a way never seen before. Case in point: more than a third of the world’s population was on lockdown to curtail the spread of the virus. COVID-19 has caused severe stress on the leisure, hospitality, and travel industry as well as other in-person services, such as non-essential retail stores, restaurants, elective medical procedures, salons, and spas. The virus caused near total closure of schools, universities, and colleges worldwide and the most significant disruption of sporting and cultural events since the Second World War with almost every single event either cancelled or postponed. That doesn’t begin to factor in the birthday parties, graduations, proms, spring breaks, weddings, anniversaries, and other important personal milestones, some of them irreplaceable, that were lost.

The economic impacts were and continue to be substantial. The April unemployment rate increased by 10.3% to 14.7%, the largest one month increase in the history of the series and the highest unemployment rate since 1948. U.S. GDP contracted 5% in the first quarter. Estimates for the second quarter, which would reflect the very heart of the shutdown, average in the -35% range. The decline during the Great Depression (1929 – 1933) was -26.7%. As a more modern-day comparison, the peak-to-trough decline during the Great Recession (2007 – 2009) was -5.1%. Personal spending plunged -13.6% month-over-month in April following a drop of -6.9% in March. Manufacturing production tanked -6.6% in March and -18% in April, falling to levels last seen during the Great Recession in 2008. Except for the fortunate industries that prospered, corporate earnings have and will reflect this significant disruption.

Fiscal and monetary responses have been unique, unparalleled, extraordinary . . . well, unprecedented. The $2 trillion CARES Act was the largest single economic stimulus package in U.S. history. To date, about $3.3 trillion in new spending and tax breaks have been authorized and additional spending bill is not out of the question. Federal Reserve support has been both massive and more broad-based than ever before. After cutting interest rates to near-zero, the Fed resumed quantitative easing and declared its “unlimited” willingness to support markets. Additionally, it extended the purchases to include corporate and municipal debt. As a result, the central bank’s balance sheet has swelled to $7 trillion, a roughly $3 trillion increase in just the last three months — approximately triple what was added in the year following the financial crisis in 2008.

Understandably, given the severity of the shutdown on a large swath of the U.S. economy, financial markets reacted quickly on the front end of the crisis to discount risk assets, primarily equity securities. Equity markets, as measured by the S&P 500, dropped from an all-time high of 3,393 on February 20 to an intraday low of 2,191 on March 23. It was a dramatic drop of -34% over 23 trading days from the peak, back to an index level last seen on November 23 of 2016.

Here’s a comparison of this decline with others in the last four decades. These statistics are all price change only and do not include dividends.

  • In October 1987, the market dropped 31.47% in just 10 trading sessions, capped off by a one-day drop of 20.47% on a day that came to be known as Black Monday. It took 436 trading sessions before the index regained the peak.
  • In September of 2000, the stock market initiated a leg down that did not reach the trough until early October of 2002 – 526 trading sessions. The trip back to peak was slow, as well, with markets not regaining the previous level until May 2007 – a round trip that took years: 1,684 trading days to be exact. We enjoyed a very brief time in that range as the next decline came shortly thereafter.
  • The market decline during the Great Recession started out as a slow slide with a 10% loss between early October of 2007 and early January of 2008. The market meandered up and down in the spring and early summer months but was sitting at down 20% from the peak by early July 2008. From September, it was mostly downhill with the markets finally settling at a low on March 9, down -56% from the peak way back in October 2007. The entire downward leg took 356 trading sessions. From peak to trough and back to peak took 1,376 trading sessions.

Those long, drawn out recoveries stand in stark contrast to what we see going on in our markets today. Markets have trended strongly to the positive side as green shoots began to appear, beacons of hope for a “V” shaped recovery. On June 5, the U.S. jobless rate actually fell from 14.7% to 13.3% as the economy added 2.5 million jobs during the month of May. This was a stunning report, even more shocking since Wall Street estimates were for a decline of 8.3 million jobs and an increase in the unemployment rate to 19.5%.

Here is where things sit as of June 5:

  • The S&P 500 has surged 42.75% in the last 51 trading days through June 5, building on what was already the best 50-day rally ever.
  • We are just barely more than 1% down from where we started the year and only 5.7% from the all-time high set on February 19.
  • Unlike some advances that are very focused on a few big names, this has been a broad-based increase with all sectors participating and 68% of the S&P trading at a new 20-day high as of June 3, the best reading in 50 years.

The chart below allows you to visualize the very condensed timeline of this current market contraction and recovery compared to the others mentioned.

market update

Though there are certainly challenges and more unattractive earnings and economic data to be reported, equity markets have significant positive momentum. Even as protests and unrest across the nation has replaced COVID-19 as the headline news, markets were not shaken. The S&P 500 dividend yield is around 1.9%. Although dividends are not guaranteed and we will likely see some reductions, those income yields compare favorably to alternatives like a 5-year U.S. Treasury note paying .4% or the Aggregate Bond Index yielding 1.4%. As low interest rates on bonds are likely to endure for some time, many feel that assets will rotate out of bonds and into the equity markets. And, not all segments of the markets have rebounded so strongly as the S&P 500. Mid small-cap and international markets are still off by 8 – 9% for the year. Conversely, the tech-heavy NASDAQ 100 is +12. 5% for the year.

As I look back over our communications throughout this, well, unprecedented event, I am proud that our messaging has been levelheaded and consistent. With all of the wild speculation and hysterical prophecies swirling around us and in the news, we hope that you have found our messaging to be useful and informative. As we trend towards a less volatile environment, we will likely communicate less frequently than we did throughout the crisis. However, as we have had strong positive feedback, we will periodically provide these updates.

As a final thought, this strong market may provide an opportunity for some clients to revisit their financial priorities  or ability to endure the risk inherent in the equity markets, and I encourage you to have that conversation with your Private Wealth team of advisors at First Business.

June 8, 2020

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