Global stock prices suffered a sharp first quarter fall as the COVID-19 pandemic triggered a global economic shutdown. This pandemic-driven selloff, heightened by turmoil in the global oil markets, was unprecedented in its speed and severity. From February 19th to March 23rd, the U.S. stock market lost over 30% of its value. The Dow Jones Industrial Average (DJIA) had its worst quarter since 1987, suffering a series of its largest one-day plunges in history during a volatile month of March. The S&P 500 index (SPX) sank almost 20% since the beginning of the year, posting its worst performance since the fourth quarter of 2008. Every economic sector and country was negatively impacted and neither growth nor value, large capitalization nor small, was spared. With all the major market indexes falling considerably from their respective mid-February all-time highs, the longest bull market in history officially ended almost precisely on the day of its 11th anniversary. International equities as measured by MSCI EAFE also declined over 23%, and even the “safe haven” asset classes such as fixed income and gold, which often benefit from these sorts of declines, had troubles of their own in March. U.S. Treasury debt yields have fallen across all maturities, with 1-month and 3-month T-bills occasionally pushed into slightly negative yields. Once again, investors started to value safety over returns, and demand is likely to keep yields suppressed in the year ahead.
As shocking as these declines are, they were not much of a surprise, given the backdrop of the expanding coronavirus pandemic. If February was the month the virus spread around the world, March was the month it really hit here in the U.S. With cases exploding in New York City and starting to spread elsewhere in the country away from the coasts, preventive lockdowns spread as well. By the end of the month, the majority of the country’s population was under some form of restriction, shutting down businesses both large and small, leading to a sea of change in the economy. During the first two weeks of substantive restrictions more than 10 million Americans lost their jobs. The layoffs resulted mostly from the mass closure of small businesses, which are the backbone of our domestic economy. The shutdown of the economy in the midst of social distancing guidelines has hit the services and consumer sides of the economy, both supply and demand. The loss of payrolls was widespread, with the hardest hit being leisure and hospitality, social assistance jobs, professional and business services, retail trade, construction, manufacturing and mining. As the damage mounted, the possibility of a recession or even a depression became very real.
There was, however, some good news during the month of March. Both the Federal Reserve and the federal government stepped in to help keep the economy alive. The Fed cut short-term interest rates to zero and started a new round of quantitative easing. The federal government put a $2 trillion stimulus plan in place to support worker incomes and small businesses. In addition, another stimulus bill is now likely underway that would provide relief for states and individuals, as well as targeted support for the mortgage and travel industries. The policy response to the coronavirus crisis in March was also unprecedented in both magnitude and speed, and it looks likely to keep the economy on life support until the country opens again. The financial markets seemed to agree with this assessment.
There is no precedent and, therefore, no playbook for the global recession that is currently unfolding. Recessions in the past were always caused by supply and demand disparities or financial imbalances. In most cases they were further provoked by a sharp increase in oil prices or triggered by a tightening of monetary policy. This time is very – or should we say fundamentally – different. Despite the record length of the expansion that likely ended in March of 2020, there were no major economic disruptions, such as the dot-com or housing bubble, like we witnessed in the two previous recessions. In our current scenario, consumers were not overly exuberant and households’ debt as the share of disposable income declined significantly compared to the global financial crisis of 2008. Companies did not overinvest in capacity, and inflation was low and stable. This inevitable recession is truly different in the sense that it was created by government decree amidst rather healthy economic conditions. To date, the unified and massive response of governments around the globe is really encouraging. Unlike doctors and scientists, these monetary and fiscal policy initiatives cannot fix the problem but they can aid the recovery by helping to make sure that as many businesses as possible are strong enough to re-start their engines to aid the economy as soon as this global pandemic wanes.
As we write this, the world continues its battle to contain the COVID-19 pandemic, which now has likely impacted, either directly or indirectly, nearly every person on Earth. This is far more than just a health crisis; this is a human crisis. It is more than just a dangerous illness, it is a test of our resolve and our willingness to delay the pursuit of economic growth for the temporary practices that are helping to contain this crisis. No one knows when and where this will end and we should be fully prepared to read more negative stories, face more shattered workplaces, and see more cancellations. But our future is not cancelled and neither is the long-term prosperity of America, our economy, and the prospects for long-term investors to participate in an eventual market recovery.
Dumont & Blake Investment Advisors, LLC
March 31, 2020