Jason Blackwell, CFA, CAIA®
Chief Investment Strategist
May 2, 2020
A number of memes have circulated over the last six weeks describing April as the longest month in history. We yearn for everyday occurrences like getting haircuts, enjoying a meal at a restaurant, and seeing our friends, clients, and coworkers in person. The markets too have moved at breakneck speed over the past couple of months. Indeed, we have had a more than 30% peak-to-trough decline in the markets followed by a 30% rally; the global economy was shut down and is now beginning to slowly reopen; while we do not have an official count of White House press briefings, it almost certainly exceeds the number over the last two years. The word “unprecedented” seems to have lost its meaning.
We maintained throughout the month of March that clients should be prepared for a potentially violent recovery in equity markets. Even the most optimistic among us, however, never expected a rally of this magnitude in only five weeks. We also advised that markets were likely to move before the data improved. Here too, we are a bit surprised at how far they have moved despite negative news. While the market has recovered much of its losses, we believe there is more that needs to happen before it reaches new highs: the development of a proven treatment or vaccine for the virus, a return to work for those without jobs, and the return of consumer spending on things other than groceries.
As evidence mounts that the virus can be contained, we need to build confidence that it can be treated (or prevented all together). A number of promising pharmaceuticals have entered the testing phase and the Trump Administration has launched “Operation Warp Speed” to accelerate approval of a vaccine. The goal is to take a years-long process and condense it into months. There will be stumbling blocks along the way, as typically less than 10% of drugs ultimately are approved. Scientists will feel the pressure to get a solution to market as quickly as possible, which may mean beginning production before approval – a risky proposition – to say the least. While the breadth of resources working toward this goal is immense (increasing the chances of success), investors should be prepared for let-downs.
Over the last six weeks, more than 30 million people have filed initial unemployment claims. In the first four months of 2020 alone, there have been more claims for unemployment than in any year since 1967. As a number of states begin the process of re-opening their economies, all eyes are on Georgia, the first state to relax social distancing. While we do not anticipate an immediate return to work for everyone that was laid off, we are hopeful that the majority of those laid off will return soon.
Optimism that the US economy might skirt a recession was wiped out this week as preliminary estimates of first quarter GDP showed a 4.8% (quarter-to-quarter, annualized) contraction. Most (if not all) of the decline occurred during the final month of the quarter as the lockdowns started. A survey of economists by CNBC and Moody’s Analytics expects second quarter GDP to decline 30% (annualized) from the first quarter. For reference, that datapoint will require significantly expanding the scale of the graph below, where the worst quarter since 1970 was -8.4%. Nevertheless, expectations are that we will see robust rebounds in the third and fourth quarters before tapering towards more normal levels next year.
Congress has moved faster than any time in recent history. However, there is more work to be done. Most of the policy to date has focused on social safety nets, aimed at creating a soft landing for displaced workers and stressed businesses. These were fairly easy for politicians on both sides of the aisle to agree on. Future legislation directed at funding for state and local governments, restrictions on companies who took government aid, employer liability protections, and incentives to bring supply chains back to the US will likely be more contentious.
We believe our role as advisors is to prepare clients for the potential of future volatility. The future is inherently uncertain, but it is even more so today. While there is a lot to be hopeful about, we are concerned that investor excitement may be outpacing the data by too wide of a margin. We continue to believe that remaining near your long-term targets is sensible. It is possible that we will endure a few more long months, but our longer-term outlook remains optimistic.