Market Update March 22nd, 2020

Just the facts as we know them:

Markets continue to decline for now, presumably until positive progress is made on the coronavirus outbreak, and/or until there is some light at the end of this economic shutdown tunnel.  

After federal and state governments temporarily shut down much of the American economy, as of tonight lawmakers still can’t agree on a complimentary funding package necessary to help compensate businesses for some of the losses the shutdowns are causing…which is required to make this shutdown possible. Is it any wonder why markets continue to look like there is no floor under them at the moment?

Due to the nature of stock markets, prices can temporarily fall frighteningly fast and to very extreme levels (temporarily) when panic selling intensifies while there are few buyers. But conversely, when the panic eventually stops and optimism begins to return, a flood of buying combined with few sellers triggers violent moves back upward. That’s what we expect to see once better progress is made in containing and defeating this virus, and as prospects improve for getting America back to work.

This is a temporary event-driven panic, not a systemic failure that will lead to a financial crisis.  This is much more like a 9/11 than a 2008 financial crisis. In both of those cases, the public experienced shock, confusion and anxiety in the absence of information available to make rational evaluations. It takes time, but the information will come, the crisis will abate, and the markets will recover.

Not only is this government mandated temporary economic shutdown extreme, rare and alarming, but it comes at a time of extreme political divide in an important election year, and in an era of continual connection to social media. Both of which combine to make us more prone to new forms of viral emotional effects that are not conducive to calm reflection.

I agree with Federal Reserve member James Bullard that this is not a recession, but rather a massive investment in U.S. public health that lays the groundwork for a rapid rebound. The shutdown measures being rolled out are deemed essential to shortening the course of the pandemic. But they must be coupled with massive temporary government support to sustain the population through the shutdown, and to prime the economy to pick up where it left off.

Recessions are the ordinary (and usually predictable) contractions in activity that mark the end of normal business cycles. Instead this is a planned, organized, partial shutdown of the U.S. economy. As Bullard says, “If economic output falls by half in the second quarter, that’s a win – not a record-setting defeat. It means businesses have headed orders to close and customers to stay home.”

30% unemployment temporarily? Sure possibly. We’re shutting the economy down as required for social distancing goals, and choosing to pay for it with large but temporary fiscal stimulus. So, as shocking as the headline numbers will sound when delivered by breathless media pundits, yes that’s what the government intended and what should be expected temporarily. As Bullard says, “we are throttling back output on purpose to meet health guidelines, and the government will transfer income to affected households so the economy will pick up where it left off when the shutdown ends.

The economy was strong heading into this crisis (growing at an estimated 3% to 3.1% in January and February), and it should resume just as healthy once this self-imposed idling concludes. A drastic slowdown in the economy is intended and expected in the second quarter, followed by what we believe should be above average economic growth the last half of this year, and probably through most of 2021.

Stocks are tremendously undervalued in our opinion, and they will assuredly come back. This is the time people will start saying this market will never come back to its old highs in their lifetimes. They said that after 9/11 before markets recovered quickly, and in 2008 before stock markets doubled from their lows within a year and tripled within four years. And again, 2008 was a severe recession triggered by systemic failure and financial crisis, while the Fed was raising interest rates to slow the economy. This today is a temporary self-imposed partial shut-down of a very solid economy…with record low interest rates (that have now gone even lower), rock bottom energy prices, and now even more fiscal and monetary stimulus/money printing (which further favors owning stocks and real estate over bonds and cash after this panic ends).

It shouldn’t be long before the big money switches to being more concerned about getting in before the turn, rather than avoiding the bottom at any cost. And the further markets decline, we believe the faster they will climb once we get some clarity as to how and when things may return to normal.

For now, this remains an extremely difficult time for all of us. Please feel free to call or email me any time as we continue to navigate the rest of the way through this current storm.