March was not just a terrible month; it was one of the worst months ever for the stock market as the world contended with the pandemic Covid-19 outbreak globally. All the stock market indicators we follow were off substantially, as were commodities. Bonds, an area of safe haven, were down marginally. Strength, however, was found in the US Dollar Index as global investors bought dollars in their quest to find a safe haven for their investment dollars.
U.S. & International Stock Index Returns
|Index March 2020 Year-to-Date|
|Dow Industrials (12.24%) (23.20%)|
|S&P 500 (11.44%) (20.00%)|
|S&P 400 (Midcap) (17.93%) (30.03%)|
|S&P 600 (Small Cap) (19.58%) (32.94%)|
|MSCI World (11.22%) (21.44%)|
|MSCI EAFE (12.27%) (23.43%)|
|Bloomberg Agg. Bond 3.15%|
|CRB Commodity Index (34.45%)|
|US Dollar Index 3.35%|
All data as of 04/02/2020, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
This month we are breaking from our normal format of looking at what happened in the different markets. If you are reading this, we assume you are well aware of the historically grave month investors just lived through, so there is no reason to go into the nitty gritty of it all. What we will do instead is focus on a big picture look at what just happened and thoughts on the future.
Before we get stared it is important to remember that while we are living through a unique period of time that will be studied and written about, we will get through to the other side. Most everyone reading this has managed through The Great Recession of 2008/9 and the aftermath of September 11, 2001. Those of us with “more experience” can think back to the 20% drop in the stock market on October 19, 1987 (know as Black Monday) and even the fall of the Nifty 50 in the mid-1970s. And let us not forget the Great Depression that began with stocks crashing in 1929.
What all these great market disruptions have in common is that we have moved past the serious issues at the time, eventually seeing now all-time high stock prices and corporate earnings. Yes, we are in unchartered territory, but in many respects, we are where we have been in the past. Bear markets always feel terrible. When it is due to an event it is scary. Yet, what I can tell you now is what my mother would always tell us kids when things weren’t working out as we expected: “this too shall pass.”
The Markets – Looking Forward
We are just going to state this right up front: no one knows exactly what is next for the markets, and anyone who says he does, quite frankly, is a liar. What we can tell you is that we are in a bear market, defined as a prolonged securities price decline of 20% or more. We can also tell you that bear markets are not typically quick events. The Financial Crisis of 2008/9 lasted more than 15 months and the Tech Wreck of 2000-2002 lasted almost three years. Of course, all bear markets (and crises for that matter) are different. So, just as this bear market happened in record time there is no hard and fast rule that says this bear market needs to linger on for another year or two.
As I (Jon Soden) write this, the market trend is lower and until that reverses the odds favor more downside for the stock market. Does that mean new lows? Maybe. But maybe not. Truth of the matter is that there is a lot happening right now that can and will have an influence on when the stock market reverses itself.
The most significant positive in the past month has to do with US Government economic policy. Very early on in this crisis The Federal Reserve Bank took bold actions to keep the economy from imploding as the country shut down. Taking a page out of the 2008 playbook, Chairman Powell has led the bank to cut interest rates to 0%, start a $700 billion bond buying initiative and then expand it to an unlimited capacity, expand its lending programs, and established the Primary Dealer Credit Facility to help fund big financial firms. On the fiscal side, Congress and the President worked together to put together the $2 trillion CARES Act which has support for both workers and businesses.
On the negative side, just as the country started to shut down, the price of oil dropped from $61/barrel at year end to $19 more recently. Yes, you may be able to get cheap gas these days, but this drop in price has serious economic repercussions:
- big losses for oil-producing countries and companies, including bankruptcies to firms that are undercapitalized, over leveraged, and are not profitable with oil at current levels.
- Job losses – 5% of American jobs are directly employed in the industry, and more are indirectly dependent on the industry.
- Significant decline in capital expenditures, a good amount of which occurs in the United States.
- A reduction in production both globally and in the United States. The US-based reductions will reduce our oil independence.
However, for the stock market, in the near term, there is a POSSIBLE positive oil scenario. The last time we saw oil prices fall dramatically was in last 2015 into early 2016. Then, oil bottomed at $26/barrel. That low coincided with a bottom in the stock market, which had lost a little less than 20% from its previous peak. With lower prices boom turned to bust – bankruptcies, lessened US production, and large numbers of jobs losses. The stock market, always forward looking, looked past the problems and had a great 2016.
Our thought: The quick action by the Government to mitigate the economic devastation from the Covid-19 outbreak, combined with the bottoming out of oil prices to 20 year lows are a POTENTIAL bottoming event for the stock market.
The Economy – Looking Forward
For the immediate future the economy looks bleak. Like most of the country, here in Pennsylvania the only businesses in operation right now are either “essential businesses” like grocery stores and drug stores, or those that are able to work from home. Wells Fargo’s Economics Group is expecting the “deepest peak-to-trough decline in real GDP in the post-World War II era” of 5% (not annualized) for the second quarter. This would be much worse if the aforementioned actions were not taken by the Federal Government.
The question we face today is a simple one: After shutting down major parts of the US economy, what does the restart look like? The answer is not so easy. There are so many different inputs to take into consideration when answering. Looking it over we came up with what we believe to be the best case and the worse case scenarios:
Best Case Scenario: Everything opens in 6 weeks with the unemployed going back to their old jobs like nothing happened. In essence, other than a pause in the economy, it’s like nothing ever happened. The CARES Act stimulus, in combination with Fed market interventions and 0% interest rates, and low oil/gas prices has the economy back at pre-crisis levels by the 4th quarter.
Worst Case Scenario: The crisis lasts longer than anyone realistically expects, causing unemployment rates to hit 20+%, resulting in a repressed economy for one to two years. The social distancing, the resulting economic havoc from shut businesses turns into an economic depression.
We are of the opinion that while both of these scenarios are possible, neither is probable. Right now there are researchers across the country and across the globe who are working on a solution to the current problem. A vaccine is not likely until 2021 at best, but a quick test for Covid-19 appears to be close. More important, in our opinion, is the quick development of an antiviral drug to treat Covid-19. Right now Japan is in phase III testing for a drug called Avigan (Favipiravir) as several other companies across the globe continue to develop and test other possible antiviral solutions.
This is all very positive but int is not likely to be a viable, global solution within the next 6 weeks. It also doesn’t lead us to believe this is a situation where the economy will be shut down for a multi-year period until a vaccine is developed. Instead we expect the economy to be shut down for a period of months. Once the antiviral solution is found and production is scaled up we expect the economy to start opening back up as the United States starts the process of getting back to normalcy.
What’s an investor to do after the fastest bear market ever? We have three recommendations.
Our first recommendation is: review your retirement and investment plan. In our world everything your investment portfolio is directly related to your plan. After a major market disruption, like to one we are in right now, it is prudent to take a look and make sure you are still on the right track. If not, time to make adjustments.
Recommendation number two is to rebalance your portfolio. After a review of your retirement and investment plan it would be shocking if you didn’t have a need to rebalance your portfolio. Mentally, this can be hard to do right here as it really is counter to what we are programmed to do as human beings. After seeing your stocks/stock funds get pummeled in the first quarter it could feel natural to maybe take some of that risk off the table, even though you should be rebalancing to ADD back the equity position that was lost. Remember this mantra: buy low and sell high.
Related to number two is to review the individual investments you currently own and see if you can upgrade your portfolio to be more forward looking. For a portfolio with individual stock positions you want to make sure you are holding great companies with low debt and solid balance sheets. Any mutual funds you own you want to make sure you have a good understanding of how the manager or management team invests your money and have a long track record of doing so. For ETFs, make sure that your funds are with the larger providers and have good market liquidity.
Right now we are all living through an historic period that will have volumes of books and studies written about in the coming years. That doesn’t make what we are living through right now any easier, but it is our current reality. We do not pretend that we have the knowledge base to predict how we get back to a more normal life. We are, however, optimistic enough to believe there will be a light at the end of this tunnel. Life will get back to normal, although not the same as before.
Thinking about the markets we expect there to be continued volatility for the foreseeable future. Volatile markets are not bull markets. Yet just like life we see a light at the end of this bear market as well.
Here at Magellan Financial we believe the market’s final turn higher will be a result of one or two news events:
- Federal Reserve Bank mandate changed to buy stocks: Back in 2005 The Federal Reserve Bank of San Francisco wrote a paper on this subject. More recently it has been seriously discussed. Congress would need to change the Bank’s mandate.
- Clarity on Covid-19: Not a vaccine but an anti-viral solution w/ drugs already on the market. This would allow the “reopening” of America. As we noted earlier in this piece, Japan is in phase three testing of a drug that looks like a real possibility.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Magellan Financial, Inc. is a separate entity from WFAFN.
Investment and Insurance Products:
|NOT FDIC-Insured||NO Bank Guarantee||MAY Lose Value|
Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com