April 3 2020 Market Update

A Global Crisis and the Path Ahead

The first quarter of 2020 was a rollercoaster. Within weeks, we went from all-time market highs – achieved despite concerns about manufacturing growth and trade – to the most rapid descent into a bear market in history.^[1] As COVID-19 gripped China and then the world, we’ve seen the global economy enter into a rough downshift.

As of this writing on April 2, coronavirus cases in the US topped 200,000, with estimates of potential deaths of up to 100,000 to 240,000. Global cases have reached 1 million, double a week ago. ^[2]

Obviously, the human tragedy is front and center – but as we shelter in place and restrict contact even with loved ones, remember that we are all doing our part to help flatten the curve and protect our communities.

Of course, there are economic implications to the pandemic as well, and as we collectively grapple with the realities – which have hit business owners, workers, retirees, and everyone in between – it’s our goal to help you grasp the current state of affairs and the possible directions that the year could take us.

Immediate Impact

Between closure orders, shelter-in-place requirements, and other disruptions, businesses have been hard hit by the COVID-19 pandemic.

Unemployment filings rose to 6.65 million in the week ending March 28, beating the record set by the previous week, which had 3.31 million jobless claims.^[3] For a sense of scale: combined with the 3.3 million filed the week before, that’s nearly half the payroll gains made since 2010, and it exceeds the 8.7 million claims made during the Great Recession.^[4]

The manufacturing sector in the US, as in China, could be hard hit. Manufacturers are responding with attempts to stagger shifts and remain operational in order to withstand the crisis. However, the threat of the disease looms, and one analysis found that potential supply chain disruptions rocketed upwards in March as COVID-19 spread throughout the global economy.^[5]

Dallas Federal Reserve President Robert Kaplan expects the economy to severely contract in the second and third quarters before a recovery can begin. He anticipates an unemployment rate in the “low- to mid-teens” that drops back below 10 percent towards the end of the year. Other estimates put potential unemployment at up to 20 percent.^[6]

The question he and many other economists are pondering is this: how rapidly will things go back to normal – back to growth – after this crisis?

The Road to Recovery

While there has been talk of a V- or U-shaped recovery, with rapid growth following the rapid decline, some economists expect more of a “Nike Swoosh,” with growth slowly ramping up after the crisis. This could be driven by a few different factors.^[7]

First is epidemiology.

As China ramps back up following a near-total shutdown, other global economies are entering the worst phase of their outbreaks. This could drag the overall pace of recovery as the disease spreads across the world.

There is particular concern about emerging markets: with a wave of withdrawals from emerging economies and a rapid fall in oil prices, the pandemic could weaken economies that are already facing potential financial distress.^[8]

Second is financial resilience.

About a quarter of US households already live from paycheck to paycheck, and the extreme financial stress that the crisis has likely brought to many of these families may take time to ease. Similarly, many companies are highly leveraged, with new highs recently achieved in the US and France. This could impact companies’ ability to rebound after the crisis.^[9]

Finally, we might need to consider psychology.

Trust, in our view, is a vital part of the economy, and the impact of social distancing and uncertainty over the first several months of the recovery is uncertain. After a period of high stress both financially and personally, people might find it easier to go back to work than recreation. Consumers might want to save or stay at home rather than go back to their previous spending habits.

Then again, we could also see the opposite, with an explosion of demand once economies reopen for business. Again, it’s impossible to predict what will happen, but consumer psychology could have a significant influence on the recovery process – especially given the importance of consumer spending to economic growth in the US.

Moving Ahead

This was an unprecedented few months. Coronavirus was barely a blip on most Americans’ radars on the New Year, and it is now a pandemic. The S&P 500 had its worst quarter since 2008, while the Dow Jones Industrial Average had its worst since 1987.^[10]

The second quarter might be even more complex, not just in the markets but in our lives. However, we do believe in the light at the end of this tunnel – we might not recover overnight, but it is our firm belief that we will recover. The US economy and the world have seen a lot, and as your advisors we believe it’s our duty to navigate times of crisis with prudence, care, and a commitment to serving you.

Please look in your email inbox for an invitation to our first teleconference seminar on April 6th. Don’t forget to register if you would like to join us for this informative session. As always, we are so appreciative of your trust and support, and we’re here to provide information, guidance, and support to you throughout this crisis.

JSF Financial