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Weekly Market Update (March 22 – March 27, 2020)

By Craig Fehr March 27, 2020

Stocks recorded their best week in 11 years and posted back-to-back gains for the first time in over a month, even though the S&P 500 remains about 25% off its February high. The Federal Reserve announced open-ended asset purchases and other measures to support the flow of credit to employers, consumers and businesses. Additionally, Congress and the White House reached a deal on an unprecedented $2 trillion stimulus package to offset the fallout from the coronavirus outbreak. We believe a flattening of the infections curve in new coronavirus cases globally is eventually needed for stocks to start looking past the incoming decline in GDP and earnings, but policy support can help prevent this health crisis from evolving into a more prolonged, full-blown financial crisis.

Five Pieces of Good News…So, Is the Coast Clear? 

Bear markets are fueled by bad news, and given the double whammy of the health care crisis and the market sell-off, that fuel tank has been filled to the top lately.

However, the market took a new (and welcomed) turn last week, mounting a rally that sent stocks 10.3% higher – the best week since 2008 – as rays of sunlight peeked through the bear-market cloud cover1. Here are five pieces of good news that we think should support investors' resolve:  

  1. Up days outnumbered down days.  The stock market rose in three of the five days last week, which was a small victory to be sure. This included the first back-to-back up days in more than a month and was the first week since February 14th in which daily wins outnumbered daily drops, including a 9.4% gain on Tuesday, the 9th-best day for the S&P 500 on record1. The stock market fell 28.4% from February 19 to March 19, declining 15 of the 22 trading days during that period1.  We doubt we'll see an equal and symmetrical upside pattern ahead, but the emergence of more up days, even as they're sprinkled within negative days, is, in our view, consistent with the behavior of a market that is closer to finding a toehold. 
  2. Unprecedented times have been matched with unprecedented policy responses. Blueprints were unveiled last week on the policy bridge needed to span this chasm created by the social-distancing lockdown, with the intention of helping get the economy safely to the other side of the virus impact in sufficient shape to foster a vigorous rebound.
    • Fiscal-policy aid – Congress passed a $2 trillion aid program, which includes direct cash payments to consumers, expanded unemployment payments, funding for small businesses (forgivable loans if payrolls are kept intact) and financial support for large companies (tax adjustments and low-cost loans).  Our view has been that a fiscal-aid program would need to be large but also targeted to direct support for the labor market. At roughly 10% of GDP, this program is almost twice the size of the fiscal response during the 2008 financial crisis and second only (though still much smaller) to Roosevelt's New Deal program following the Great Depression.  Execution will now be the critical element, as the business funding/aid will need to be administered through the retail/commercial banking system and the Small Business Administration (SBA). But a coordinated fiscal effort is, in our view, a requisite element of economic and market stabilization.  
    • Monetary-policy stimulus – The Fed has also reached deep into its toolkit to ensure the financial system is well-oiled and sufficiently stocked to handle this economic shock. In addition to cutting rates to zero and reinstating its bond-buying program (to effectively juice the money supply and keep rates low), the Fed announced it will leverage the Treasury's fiscal aid to add significant funding and support to the credit (bond) markets.  This will expand the access to funds and loans for consumers, small businesses, corporations and municipal markets. Two weeks ago, corporate and municipal bond markets saw a jump in volatility as fears rose that the economic shock would disrupt businesses' and local governments' ability to access funding or service existing bonds. Bonds rose last week as the Fed's pledge for extraordinary liquidity (to the tune of several trillion dollars) brought some calm back to the fixed-income markets.
  3. Bad data is no longer automatically driving bad reactions.  As news around the coronavirus' global spread increased, along with the accompanying negative economic impact, it was met with unmitigated declines in the equity markets. Performance in recent days is a positive signal, with stocks posting gains at the same time that economic readings have been increasingly negative. For example, last Thursday's release of weekly initial jobless claims revealed a staggering 3.3 million new unemployment claims, up from 282,000 the week prior. For context, we've never seen a reading above 700,000 in history. And yet, the stock market rose sharply on Thursday, finishing up 6.3% for the day1. There is nothing good about this surge in unemployment, so how can this be interpreted as a potentially positive signal? In the broader context of this bear market, an encouraging sign for investors is when bad news can be accompanied by less bad, or even positive reactions in stock prices. This signals that the market is beginning to more fully price in negative outcomes. We will continue to get negative readings on the economy for some time to come, including what we anticipate will be a sharp (but potentially temporary) spike in unemployment in April/May and likely the biggest quarterly decline in U.S. GDP in nearly 100 years. But just as the market didn't wait for the economy to come to a stop before it began its descent, we don't expect it to wait for all of the negative economic reports to subside before it begins to rebound. All bad economic news won't be greeted with positive market reactions, but such opposite reaction signals to us that much of the bad news may be already reflected in current prices, allowing the market to look ahead to what we believe will be more encouraging news/data later this year and setting the stage for a sustainable rebound.  
  4. Small signs of health care progress.  The brutal reality remains that the epidemiology of this situation remains highly unpredictable. That said, we suspect that some component of last week's market rally was driven by glimmers of progress on the medical front – as small and/or early as they may be.  Testing capacity in the U.S. is beginning to ramp up, and nationwide social-distancing practices – while exceptionally painful for the economy at the moment – are potentially shortening the timeframe to a peak in new cases (one of our four necessary tenets for a lasting rebound). Moreover, we think the experiences playing out in the Eastern Hemisphere offer the market a potential glimpse into the future, which may be adding to some optimism.  There is some evidence that the growth rate of cases in Italy may be slowing, while businesses are reopening in China, fostering a sharp but early rebound in economic activity within the world's second-largest economy. 
  5. When it comes to investment performance, there's more than meets the eye.  The bear-market sell-off (20% or more) in stocks has garnered plenty of attention, not only because it's the first in more than a decade, but also for its velocity in getting there – falling from an all-time high to a bear market in just 15 days (the fastest ever)2. While the magnitude of the decline may also feel unsettling, the headlines don't necessarily tell your personal story. Remember that diversification shows its mettle in times like this.  As the chart below demonstrates, a balanced, diversified portfolio of stocks and bonds, while not immune to market volatility, has traveled a smoother path. Notably, when the S&P 500 was down 30% for the year just a few days ago, a 50/50 diversified portfolio was off 18%1

Is the Coast Clear?
The market has risen 10.3% from its lows last week – an encouraging, but not surprising, rally1.  At the same time, we don't think this is a new one-way direction higher. As we noted a few weeks ago, we think four things will be necessary for volatility to subside and the sustained rebound to take shape: a peak in new virus cases in the U.S., extraordinary monetary-policy stimulus, a sizable fiscal-aid package that preserves the labor market, and a downward revision to expected corporate earnings that provides some clarity about the path for profits later in 2020 and into next year.

We think progress is being made on this list, but bear in mind that financial aid from the U.S. Treasury and unprecedented stimulus from the Fed are not a cure for what ails the markets. Instead, we view them as the bridge that will help the economy to the other side of this expanse. This bridge will need to be built quickly, and the heavy traffic (of financially distressed businesses) will need to be effectively managed. We expect jams along the way, but the magnitude of the policy response is good news, in our view.  

That said, the timeline for the market will ultimately be dictated by advances in new virus cases. Therefore, we think market volatility will continue as news on that front comes in. In other words, we've cleared a few trees, but we don't think we're out of the woods yet. Markets will need to time to catch their breath. We'd note that strong rallies often occur within bear markets. For example, the S&P 500 rose 24% from November 2008 to January 2009, but volatility persisted for another two months in 2009 before the market began its sustained rebound1. Broadly, investors today should find some encouragement in the fact that 1) there is some good news out there and 2) markets will, in our view, grow increasingly willing to look to better news ahead as we make progress through this health care crisis. 

Sources: 1. Morningstar Direct 2. Bloomberg

Craig Fehr, CFA
Investment Strategist

Index Close Week YTD
Dow Jones Industrial Average 21,637 12.8% -24.2%
S&P 500 Index 2,541 10.3% -21.3%
NASDAQ 7,502

9.1%

-16.4%

MSCI EAFE* 1,549.49 11.2% -23.9%
10-yr Treasury Yield 0.69% -0.3% -1.2%
Oil ($/bbl) $21.58 -4.6% -64.7%

Bonds

$115.42 4.9% 2.8%

Source: Morningstar, 03/27/2020. *4-day performance ending on Thursday. Past performance does not guarantee future results.

The Week Ahead

Important economic data being released include consumer confidence on Tuesday, the manufacturing Purchasing Managers' Index on Wednesday and the March jobs report on Friday.

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after market close.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Dividends may be increased, decreased or eliminated at any time without notice.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

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