Spring 2020 Market CommentarySubmitted by Affiance Financial on April 8th, 2020
It is hard to believe how much has happened this quarter, and the severity of the damage to the stock market from the coronavirus pandemic in just a few short weeks.
During March we officially entered a bear market, defined as a 20% drop from the highs, which were reached in mid-February. Our benchmark for U.S. stocks, the S&P 500, had a maximum drop of 34% before recovering towards the end of March. However, the S&P 500 is heavily weighted towards technology companies which have continued to do relatively well versus the rest of the index. To get a better sense of the carnage last month, more telling indices are the Equal Weighted S&P 500 and the Small Cap Index, which had maximum drops of 39% and 42% respectively. On a positive note, the bottom was reached on March 23rd, and since then, we’ve seen the market quickly recover about 8% of the losses due to aggressive actions by both Congress and the Federal Reserve. Congress has stated that more needs to be done to combat the pending economic fallout from the pandemic. It is very possible that Congress and the Fed will try to further dampen economic weakness and stimulate the economy.
So, where do the economy and stock market go from here? The market is complex and there are many unknowns. As of this writing at the beginning of April, we don’t know the exact damage to the economy, but we do know the economic data will not be good: characterized by a significant drop in Gross Domestic Product (GDP), a significant increase in unemployment, a significant drop in corporate revenue and earnings, an increase in infections and, unfortunately, morbidity. We believe that it is likely that we will go into a global recession, as 70% of our economy is based on consumer spending which is currently frozen. Unfortunately, we don’t know to what degree the market has already priced in the bad news, and to what degree further market decline will follow.
On the positive side, we believe that it is highly probable that as the global medical community works on this virus, a vaccine and methods of treatment will be developed. And, we are more confident that the market has likely not factored in the potential good news. Therefore, when good news is announced, and it will eventually happen, we believe the market will react positively and rapidly. When the pandemic and shelter in place end, consumers will work to get their lives back in order as markets recover.
Because of the fact that there are so many unknowns, both negative and positive, we need to change the frame of reference when considering your investments and try not to think day-to-day. Rather, consider the fact that your portfolio is designed for decades not days. It is an unfortunate investing fact that in order to earn stock market returns, we must also suffer though periods of losses, and those losses occur with some regularity. Bear markets occur about once every six years or so. In spite of those nerve-wracking periods, we continue to believe that the best strategy today is to stick to the long-term plan, which includes a portfolio that is diversified and appropriate for your risk tolerance and long-term goals. In times like these, it is easy for our emotions to get the better of us. Alternative plans made in the heat of the moment may appear to be clever, but do not always hold up to scrutiny. Trying to time the market tends to create a situation where investors lose on both the downside and the upside. For this reason, we continue to strongly suggest sticking with your long-term plan. We continue to review our Investment Strategies and make adjustments as they are appropriate.
Thank you for your continued confidence in our work.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.