Unprecedented—that’s the word that comes to mind when reflecting on the current health and economic crises caused by the COVID-19 pandemic. The virus itself has not caused the market to decline nor the global economy to grind to a screeching halt, but social distancing has. While plenty of post-pandemic analyses will assess whether this was the “best” approach for society as a whole, there’s no question that this highly infectious and quickly spreading virus required a rapid response. The good news is that new cases seem to have slowed in areas that were initially hit the hardest. We hope this is a glimmer of light at the end of a dark tunnel.
Forecasting economic statistics after large swaths of the economy have been shut down is like trying to envision something that has never happened before. Anyone can try, and some may come close, but they are all just guesses. We are likely headed into a recession, which is technically defined as two consecutive quarters of negative GDP growth. I prefer Harry S. Truman’s definition, though: It’s a recession when your neighbor loses his job; it’s a depression when you lose your own. We have a lot of collective neighbors who have recently been pushed into the unemployment line, roughly 10 million in the last two weeks (unprecedented). While most of these layoffs will be temporary, it’s of little consolation to those currently experiencing joblessness.
Fastest ‘Bull’ to ‘Bear’ Market Decline
In anticipation of the above, the stock market’s decline and government’s response have each been unprecedented (there’s that word again) in several ways. The speed at which we went from a “bull” market to a “bear” market (defined as a decline of 30% from the highs) has been the fastest ever. The chart below compares the number of days it has taken to get 30% declines:
Source: First Trust Portfolios
Equally as eye-popping has been the size of the daily market movements. The chart below shows the % daily market changes over the last few years with the recent period highlighted:
Source: St. Louis Federal Reserve
If that isn’t enough to make even the most seasoned investor queasy, I don’t know what is. There have been a couple of days of indiscriminate panic selling reminiscent of 2008. Even bonds and gold, which have held up relatively well in this environment, were sold with everything else.
Federal Aid Programs
To combat the damage done to the economy and markets, the government’s response has been even bigger than in 2008. On the monetary policy side, the Fed basically threw the kitchen sink at the problem pledging unlimited support to the functioning of the markets. Just like in the Financial Crisis, in addition to lowering rates to zero, they started several programs with fancy acronyms to boost the confidence of the markets.
On the fiscal policy side, Congress passed the CARES Act, the largest emergency stimulus bill ever. Here’s a breakdown of what that looks like:
Source: visualcapitalist.com
While this package will help, it probably won’t be enough to completely plug the economic hole, depending on how long the shutdown lasts.
What Will the Next Few Months Look Like?
Our best guess is we are in for a rough two quarters economically and then things will start to bounce back (assuming we can safely reopen the economy). We will learn more about how to live with and
manage through these types of risks in the future. When we are through this crisis the world may look slightly different, but the amount of pent-up demand from people being stuck at home will be a significant boost to the economy.
Our Investment Committee’s Approach
Our Investment Committee has been meeting frequently—more frequently than usual—to look at our research and make appropriate portfolio decisions for clients in this environment. Our indicators have signaled to us that the best course of action is similar to hydroplaning: put both hands on the wheel, let off the gas, and avoid slamming on the brakes. When our indicators turn positive and it looks like we have traction again, we will reapply the accelerator.
Since everyone’s portfolio is different, recent trade activity was either minor shifts in the portfolio and/or tax-loss harvesting. (If you would like a reminder of what that is and how it benefits you, please let us know.)
As most of our clients know and have been reminded in meetings lately, a good financial plan takes into consideration risks like this so that we don’t have to dramatically alter one’s plan. One strategy we advise, and help implement, is to keep enough liquidity to weather storms like these and avoid having to sell investments when they are down. What that looks like for retired clients living off their portfolios is keeping six months of distributions in cash. What that means for working clients is cash flow planning to keep six months of living expenses in cash.
No doubt these are unimaginable and uncertain times. While each crisis is different, we will get through this one just like we have every other dark time in history. I’m reminded of a Mr. Roger’s saying about trying to focus on the positives in bad situations: When I was a boy and I would see scary things in the news, my mother would say to me, “Look for the helpers. You will always find people who are helping.” That is certainly the case now and it’s inspiring to see people rally around those in need.
Please stay safe and let us know if you have any questions.
Mike Gallagher and the TPG Investment Committee
Advisory services offered through TPG Financial Advisors, LLC, an SEC-Registered Investment Advisor and a wholly owned subsidiary of The Partners Group, LTD.
