As the country and much of the world rapidly plunged into a health crisis, the risks to health and the disruptions to daily lives go beyond anything we’ve ever experienced. Compounding that, markets have tipped into panic. It’s OK to feel uneasy in the face of such dramatic and rapid disruption.
Immunologists tell us the medical news will be grim, becoming significantly worse over the next several days or weeks. With a lag, economic reports that follow are also all but certain to be exceptionally bad.
Yet as scary as that is likely to be, we must remember that this economic downturn is different from all former downturns in a critically important way: in others, as economic activity receded, there was never at the time, much evidence or expectation of when recovery would begin, whereas, this time, we know economic activity will begin to pick up as soon as the medical “all-clear” is sounded. Most furloughed workers will be recalled. People will go shopping and dine out. They will go to movies and sporting events. People will take vacations. They will be happy to get their lives back to a sense of normalcy. Of course, some businesses, especially smaller businesses, will close their doors because they couldn’t borrow enough to cover expenses during the period of closure, but most will muddle through. We don’t know how long the economic pause will last, but we may be confident that absent any other significant shock such as outbreak of war, the receding of the virus and the subsequent relaxing of social distancing orders will be the catalyst to begin economic recovery. And if history is any guide at all, markets will sort out a bottom and turn up sometime before that.
That said, we must also voice a minor word of caution. Market volatility has exploded in a way that has only occurred occasionally, and when financial markets experience a shock of this magnitude, things usually break. Given how violently oil prices, Treasury bond prices, stock prices, and the dollar have moved, we have been surprised that there has yet to be news of one or more big hedge funds or investment banks having gotten into serious trouble because of large trading losses. That may yet occur. Or a similar moment may arrive with an anticipated wave of credit agency downgrades of bonds already at the low end of the “investment grade” range. The point is that meaningful surprise financial system shocks may still lie ahead. And separately, stock market bottoms typically slightly follow rather than coincide with large spikes in volatility such as we have recently seen.
However, even if there is more turbulence ahead in the short term, on the other side of this episode, a strong economic rebound is likely given very low interest rates, low inflation, cheap energy prices, massive fiscal stimulus, and coordinated maximum accommodation from worldwide Central Banks. That’s a powerful combination, which should lead to strong stock market returns from today’s depressed levels. We just have to get past the market’s unpredictable and likely brief panic phase. But this fever will break, if for no other reason that such unusually high levels of volatility historically don’t sustain themselves for very long.
Precisely because stock prices have come down as much as they already have, long-term returns from this point forward may be reasonably expected to be better than they have been since March of 2009, eleven years ago. This is a time for layering in stock purchases through rebalancing and a time for confidence in the ultimate resilience of the American spirit.
Stay well, and please feel to reach out to us if you have any questions.