By Nancy Johnshoy, CFA
I can only speak for myself, but I am eager to get back to normal. While I haven’t endured the hardship experienced by many fellow Americans and I’ve enjoyed organizing my closets and sock drawers, life is not the same without the variety of people I normally interact with on a daily basis. As we start to think about the “when and how” of getting back about our lives, we realize how many things will be different, some temporarily and some perhaps permanently. It raises the question of what we know today versus nearly two months ago as we began our “safer at home” journey.
Over the last few weeks, we started to get our first indications of the damage that the Great Shutdown has wrought on our economy. Like a canary in a coal mine, weekly jobless claims were the first to fall over when the atmosphere was less than perfect. Weekly claims piled up to an impressive 33.5 million in just seven weeks. On May 8, we learned that the unemployment rate for April surged to a record 14.7%, dropping by a historic 20.5 million workers in a single month. This is a high water mark in official data going back to its inception in 1948. Economists believe that unemployment peaked during the Great Depression at around 25%.
With regard to the unemployment number, please keep a few things in mind. The CARES Act, signed into law on March 27, extended unemployment benefits to some workers not typically eligible for benefits, including self-employed workers, independent contractors, workers with limited employment history, and people who left jobs due to coronavirus-related disruptions like illness, caregiver responsibilities, or quarantine. The CARES Act not only extends benefits 13 weeks beyond the typical 26 weeks of unemployment benefits, but does so at an increase of $600 per week in benefits, all fully funded by the federal government. These additional benefits remain in place through December 26, 2020.
The federal government provided the benefits listed above as a lifeline to those displaced by COVID-19. Additionally, many employers applied for and received PPP or Paycheck Protection Program loans made available under the CARES Act. One of the most attractive aspects of these loans is the potential for loan forgiveness if certain criteria are met. A cornerstone of this lending program is that funds are used for payroll expenses. Although I have not yet heard that this is a problem in our geography, many areas of the country are having difficulty luring employees back to work when, depending on their circumstances, some employees benefit financially by staying at home. This may continue to impact the unemployment rate well into 2020 and until the enhanced benefits lapse.
We have started to get a look at the impacts of the quarantine on earnings. With almost 60% reporting, first quarter earnings for the S&P 500 are estimated to be down -23% from a year ago. FactSet 2020 earnings growth estimates (chart) reflect significant anticipated declines in earnings by many sectors hard hit by the pandemic. And yet the stock market appears to endorse the belief that the economy will be back on track, and sooner rather than later. There is no doubt that the sheer quantity of stimulus and support provided by the federal government and the Federal Reserve will provide a leg up to the recovery. At the risk of another 80s reference, the Federal Reserve is the plutonium in the flux capacitor. Having some clarity around available liquidity, support for orderly bond markets, and direct assistance to businesses and individuals has gone a long way to calm the financial markets.
Let’s bring some context to the stock market action so far in 2020. We started the year up 4.8% through February 20. As COVID-19 took hold and fear and panic reigned, the S&P 500 lost just shy of 34% to briefly settle at down -30.75% excluding dividends for the year. This all happened in just 23 trading sessions. We officially crossed into bear market territory on March 20 when the S&P registered a 20% decline from the peak. On March 25, the market did an about-face, beginning with a one-day gain of +10.64%. Since then, over a period of 32 trading days, the S&P 500 has moved higher by 31% from the bottom and sits down less than -10% for the year or -8.5% with dividends included. Based on the most common definition of a bull market, where stock prices rise by 20% subsequent to a drop of 20% or more, we reentered a bull market on April 8. Bear markets are historically punctuated by false rallies and only time will tell if that is indeed the case here.
We have cautioned and counseled many times that investors should resist the urge to fold their cards during times of great uncertainty. However given the significant and rapid market recovery, and based on the level of uncertainty upon which the foundation of this current rally is built, we are looking for opportunities to reduce risk at these relatively higher market levels. To that end, we have taken several steps by both revising our holdings to include some lower volatility investment vehicles and, just recently, by realigning to the neutral point of our asset allocation models. To accomplish that realignment, we trimmed our equity positions modestly across all models.
As always, the key question for every investor is whether or not you have the right investment approach to meet your long-term goals. That “planning” question always takes on more significance in times of heightened market volatility. I would suggest that if you have not done so fairly recently, right now is an advantageous time to revisit that question with your advisors. Are you on track, if not what is it going to take to get on track? Personally I am eager for the opportunity to see my clients soon in person, although, like many of us, I hope to see my hair dresser first!
May 12, 2020
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