Market Data for the quarter ended March 31, 2020:
- S&P 500 Stock Index: 2585, down 20.0%
- Ten-year Treasury Note Yield: 0.70%, down 1.22%
- Gold: $1,591 per ounce, up 4.5%
- Oil: $20 per barrel, down 67.2%
Stocks crashed in the first quarter of 2020, as the world faced an unprecedented economic shock in the form of the viral pandemic Covid-19. Whole sectors of major economies have ground to a halt, and estimates for the loss of GDP for the upcoming quarter approach 30%, with nearly matching unemployment. Traditional safe havens such as gold and US Treasury bonds rallied, while the price of oil collapsed in the face of collapsing demand and a price war between Saudi Arabia and Russia. Stocks had fallen by as much as 35% before recovering some of their losses to end the quarter on hopes that a massive government financial response to the crisis would draw a line under the economy and markets. Between government spending and extraordinary measures from the Federal Reserve, six trillion dollars will surge into the economy in the months ahead, equivalent to a whopping 30% of US GDP.
The challenge facing investors moving forward is gauging progress on two fronts: public health and the financial solvency of consumers and business. Simply put, the longer it takes to contain the virus, the more difficult it will be to keep consumers and business out of severe financial duress, which in turn would impede the ultimate recovery in the economy. We view as an optimistic scenario the pandemic being largely contained by this summer, which would lead to a relatively vigorous second half economic recovery and higher share prices. In this scenario, the low of the bear market is likely in. The worst-case scenario would be no containment through the summer and into the winter of 2020-21, with containment only occurring in the spring of 2021. In such a scenario, consumers and firms would likely be severely hobbled, and the ensuing recovery would be a slow grind higher, with shares moving significantly lower from today’s levels in the interim.
We see the optimistic scenario as being the more plausible of the two. Significant social distancing measures have been adopted in much of the country, with three out of four Americans sheltering in place. Based on the experience in Hubei province in China, such measures resulted in peak infections occurring three months after the first appearance of the virus. In America, this would indicate peak infections occurring in early to mid-May. Furthermore, although it is not certain, the virus will likely be negatively impacted by the warmer, more humid weather of late spring and early summer. This is typical for airborne viral infections, and most studies on the coronavirus point in this direction. In this scenario, social distancing measures can be gradually relaxed over the summer, with firms and individuals emerging from the epidemic in reasonable financial condition and ready to resume economic growth.
Given the heightened uncertainty and volatility of the situation, we do not feel comfortable providing a projected trading range in stocks for the remainder of the year. Elevated volatility will likely persist for the remainder of the spring, at least, and we fully expect episodic violent selloffs in the months ahead, even if a bottom in the market has already been put in. (The closing low for the selloff in the S&P 500 was registered at 2237 on March 23rd. It currently stands at 2585.) Please note that a risk to the optimistic scenario we detail above is a strong resurgence of the virus in the fall. The hope is that governments ensure adequate medical capacity, to include testing, hospital beds, and ventilators, such that widespread social distancing measures are not again needed.
We are happy to announce that Anita Mauro, Dan’s wife, will be joining PMIA effective April 1st. Anita was a law partner at Thompson Coburn LLP, practicing both secured lending and real estate incentives and appeals. Prior to being an attorney, Anita worked in retail banking at the First Bank of Highland Park. Anita will be the chief operating officer focusing on customer service, regulatory compliance, and marketing. Pat and Dan will continue to focus on investments, while Henry continues to focus on marketing.
In these harrowing times, we appreciate the trust and confidence you have placed in us. We are always available to discuss your asset allocation and the investment environment more broadly, so do not hessite to contact us with your questions and concerns. We wish you health and safety as we continue to move through the present situation and look forward to better times ahead.