​It has been a difficult month for investors. Since the February 19th peak, the S&P 500 Index has shed 34% to its most recent low (St. Louis Federal Reserve). That’s roughly in line with the average bear market pullback (LPL Research), with bear markets being defined by at least a 20% sell-off.

However, the rapid decline in the major stock market indexes has been unsettling. The 34% drop occurred in just over one month. It’s unprecedented.

But what we are seeing in the economy is without precedent, too. There is an enormous amount of uncertainty. Many industries that require person-to-person interactions are being shut down. And many of the service-related companies that remain open have seen a significant drop in traffic.

Since there is no modern precedent on which to model economic forecasts, the second-quarter projections for GDP have been incredibly wide. If we connect the dots, the economic uncertainty has translated into earnings uncertainty which in turn has translated into incredibly volatile markets.

A government-induced economic coma

In order to slow the spread of the pandemic, the government has encouraged social distancing, and several states have ordered lockdowns or strict shelter-in-place mandates. You may go outside to exercise or head to the grocery store, but there is a ban on social gatherings, which would spread the virus.

While social distancing will slow the spread of COVID-19, the economic impact has been unparalleled. In a way, the government is putting key sectors of the economy in a coma, as it hopes to stem the spread of the virus. When health and safety dictate, the goal is to bring the ‘patient’ out of the coma.

But policymakers aren’t expecting the economy to bounce back on its own. If shutdowns are encouraged or enforced, policy is being put into place to revive the patient when the time comes.

The government response to soften the expected economic blow has been extraordinary and goes well beyond what we saw during the 2008 financial crisis.

The Federal Reserve has not only dropped the fed funds rate to zero, but it has implemented several programs designed to support Treasury bonds, investment-grade corporate bonds, commercial paper (short-term IOUs issued by the largest corporations), money market funds, mortgage-backed securities and municipals.

Further, a new program designed to support small- and medium-sized businesses will be forthcoming.

During the financial crisis, the Fed’s focus was on Wall Street and critical credit markets. Today, the scope of support extends well beyond Wall Street and into Main Street.

Meanwhile, Congress has passed and the President has signed a $2 trillion stimulus bill.

In addition to mitigating some of the damage from surging layoffs, the Federal Reserve and the Federal government are trying to put a foundation in place that will support a robust economic recovery.

Will it work? Much depends on the duration and severity of the recession and the path of the virus.

Road to recovery

I see four steps that are important.
1. A massive response by the Federal government and the Federal Reserve. I think we can check that box. While continued volatility is likely, a modest rebound from March’s low was fueled by the Fed and the $2 trillion stimulus plan.

Other pieces of the recovery puzzle include:
2. A peak in new U.S. cases and subsequent decline.
3. An effective treatment and vaccine.
4. Clarity on the economic data. What will be the steepness and duration of the recession?
No one rings a bell that sounds the all-clear signal. Collectively, markets attempt to price in future events. Given the wide range of outcomes, volatility has been the rule of the day.

But stocks will likely bottom before the economy rebounds.

Thoughts

I spend an enormous amount of time discussing the importance of your financial plan. It is our roadmap in good times and bad.

It is based on a simple premise: stocks rise more than they fall, and stocks rise more than they fall because historically, the U.S. economy has expanded over time.

I understand that what is happening is unprecedented. We are in the midst of an economic and health care crisis. Both breed fear and uncertainty. 

But I am confident this pandemic eventually will pass, and I am confident that the underlying fundamentals of the U.S. economy remain strong. Resilience and ingenuity are part of the DNA that make up America. We will persevere and we will recover.

If you have questions, concerns, fears, and doubt; I get that. I do. And remember, my line is open. I’m here to help.

As February began, most investors were keeping a cautious eye on the coronavirus that was spreading in China. While there were isolated outbreaks around the globe, they were just that – isolated.

Some firms began to back away from prior financial forecasts, but a mistaken belief the illness would be contained to China kept markets tame.

That changed dramatically when headlines surfaced that the coronavirus had spread to northern Italy, South Korea, and Iran. 

The good news: new cases appear to have considerably slowed in China as of March 1, according to Worldometer, which combines data from global health organizations.

The illness is spreading in Italy and South Korea. Iran isn’t far behind, but it’s widely believed the economically isolated nation is dramatically underreporting the intensity of the virus. 

What’s behind the market sell-off? Driven by computer sell programs that take their cues from headlines, the hit to stocks originates amid anxieties that coronavirus will damage the U.S. and global economy.

When it was contained to China, there were fears that shuttered factories would disrupt the flow of parts that are made in China and are used by U.S. companies. Economists call this a ‘supply shock.’ As the name implies, a supply shock reduces the supply of goods available to businesses and consumers.

Today, there are growing worries that any disruptions to normal routines could also pressure the demand for goods and services, delaying a projected acceleration in corporate profits this year. Economists refer to this as a ‘demand shock.’

Earnings in 2019 are forecast to rise just under 1% from 2018 (Refinitiv). For 2020, profits are forecast to rise 7.7% (Refinitiv, Feb 28). However, as analysts begin to ratchet down forecasts in response to the change in economic sentiment, these recent projections could be out of reach.

Perspective: Coronavirus and past epidemics

The virus has created heightened uncertainty. This heightened uncertainty means that the number of economic outcomes has widened. In this case, they are all to the downside.

But, are investors overreacting? Is the public overreacting? The flu has infected 32 million–45 million people in the U.S this season per the CDC, which began on October 1. There have been 310,000–560,000 hospitalizations, and tragically, 18,000–46,000 deaths. Yet, for the vast majority of us, our daily routine goes on uninterrupted.

In comparison, just 88 Americans have contracted the coronavirus as of March 1. Per the Wall Street Journal, “The new virus is particularly challenging for public-health officials because people who are infected and transmitting to others might have only mild flu-like symptoms, or no symptoms at all, making them difficult to identify.” 

Knowing the virus creates only mild flu-like symptoms; in some people may alleviate some worries. (Of course, the elderly and those with compromised health must be more cautious.) 

On the other hand, compared to the seasonal flu, the coronavirus seems to be more contagious and deadlier, despite the fact that confirmed U.S. cases number a fraction of the annual flu.

Health officials do not have a complete understanding of the virus, but our knowledge is progressing.

While we don’t know if this will eventually turn into a significant health crisis, we’ve lived with epidemics before, including the measles, polio, SARS, MERS, H1N1, and the flu, which strikes every year and can be deadly. 

During the H1N1 pandemic of 2009 (coronavirus has yet to be deemed a pandemic by the World Health Organization), there were approximately 60.8 million cases, 274,304 hospitalizations, and 12,469 deaths in the U.S. between April 12, 2009 to April 10, 2010. Despite the human toll, stocks were already in the early phase of a bull market.

Today, we’re being pelted by wall-to-wall media coverage of the coronavirus. In 2009, the media may have been more focused on a new president and the Great Recession, limiting the hysteria.

Fear spreads fast, but keep perspective

While we can critique the media and stock market reactions, what we know is that the market has sold off. Fear has spread far faster than the virus. As we enter March, the economy is on a solid footing, and the banking system is in much better shape than 2008.

On Feb 28, Federal Chief Jerome Powell reaffirmed, “The fundamentals of the U.S. economy remain strong,” but added he is “closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” 

The last sentence is the Fed’s way of hinting that a rate cut or other actions are being carefully considered.

That said, we know that volatility in markets is inevitable, but has typically been short-lived. Stocks sometimes take the stairs up and the elevator down. This bout of volatility will end, but calling a bottom is virtually impossible. You and I know that no one has a window on the future.

Once again, I will emphasize that your financial plan incorporates your goals and is based on a number of factors, including risk preferences and time horizon. 

It is a roadmap to your financial future. It incorporates the inevitable market declines and is designed to help keep you from making rash decisions when markets turn volatile. Or, for that matter, when stocks surge ahead and one may be tempted to take more risk.

I recognized that these are trying times, not simply from the vantage point of the investment community. No one likes uncertainty, especially as it relates to our health and the health of our loved ones. 

Uncertainty drains our most precious resource: peace of mind and happiness. Turn off the news, get outside, and turn to what brings you peace. I am confident that this too shall pass, and we will be better for it.

If you have any thoughts, questions, or concerns, feel free to reach out to me. That’s what I’m here for. My door is always open.