Daily market movements have been unprecedented. Movements that typically take a year or longer are occurring in single trading days. The volatility is certainly unsettling, but it is not a time to attempt to time the market, rather it is time to maintain a long-term perspective. We all understand that is has been an awful year for markets around the world with the S&P 500 down approximately 25% year-to-date. Why is timing difficult? If you missed the single best market day this year, you would be down much worse, close to 32%, the best three days 42% and the best 6 days 55%.
Massive Government Stimulus vs Terrible Coronavirus News
The Federal Reserve and Federal Governments actions to assist both the economy and markets are extraordinary in both its swiftness and size. The Federal Reserve acted first by lowering the Fed Funds rate and implemented a massive bond buying program known as quantitative easing. The Federal Reserve is going so far as to purchase corporate bond Exchange Traded Funds (ETFs) for the first time. The goal of the program is to maintain liquidity and stability of lending markets during the pandemic, along with a financial boost once the pandemic passes. The Federal Government has agreed to a two trillion-dollar coronavirus stimulus plan which is expected to be approved shortly. Two trillion dollars is a difficult number to grasp but is more than the entire GDP of Italy, more than half the GDP of Germany and close to 10% of U.S. GDP. We all understand that the coronavirus will cause an economic shock. The hope is that this stimulus will “get us through” until the pandemic is in our rear-view mirror. Remember financial markets are forward looking; it is likely that once we feel better about the coronavirus that the lows in the market have already been set.
We all have been inundated with terrible news with the quick spread of the coronavirus and deaths both worldwide and in the United States. There is no denying that this a human tragedy first and foremost that is leading to economic destruction like we have never seen in our lifetime. Which is why the current government response dwarfs the support seen during the financial crisis. A massive stimulus from the government will hopefully allow the huge unemployment claims to be temporary and allow the economy to resume without too much lasting damage.
After the swift declines in the market there is no short-term consensus among analysts as to where we go from here. Some have said that the lows are in, some are predicting that we must re-test recent lows and some feel that the markets must still go lower. Despite no short-term consensus, there is a long-term consensus and that is that stocks will be higher in the future.
From an investing standpoint, this feels a lot like the financial crisis of 2007-2009, however, there are distinct differences. The intricacies of the financial crisis could never be conveyed in a few sentences but to sum it up the financial crisis was an economic disaster fueled by leverage. Leverage pushed housing prices to astronomical levels and as home prices fell the effects of that leverage was felt by every sector of the US economy, this is one of the reasons regulators have focused on the safety of the banking sector.
This is not a financial crisis. This is an external crisis more akin to a natural disaster. Prior to the pandemic the economy was sound. Recent economic numbers prove that it was stronger than even thought. This is a positive, from an economic standpoint there could have been far worse times for this to happen. During the financial crisis we asked investors to have faith in America, American spirit and ingenuity. That faith proved beneficial and I believe that we must maintain that faith. If you believe in capitalism, then you must believe in equity markets over the long-term. Finally, I sense a distinct difference in people. The financial crisis triggered animosity like we have never seen before. I don’t feel animosity now, I sense a feeling much more aligned with what we witnessed after the September 11th attacks. A feeling that we are all in this together, a feeling that we want to support people and businesses especially those disproportionately affected by this pandemic. A sense that once this passes, and it will pass, that as a people we are ready to get back out there, work hard, help each other and grow. There will be trying times, there will be bad news both on a human level and an economic level, but we will get through this and likely come out stronger on the other side.