Market and Policy Response to Coronavirus



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Our Take on What’s Happened, What to Expect and What to Do. 

We have been as surprised as anyone about the rapid onset of the COVID-19 virus and the equally rapid deterioration in financial markets. As markets began to understand the uncertainty surrounding the virus and the various policy responses to it, they have unwound in spectacular fashion.

What Happened? 

This has been the most rapid onset of a bear market in history. Just one month ago, we were making new highs in the markets. At this writing, the S&P 500 has declined by 34% from the market peak on February 19, 2020 to the most recent low on March 23, 2020. Thankfully, we’ve gotten a substantial relief rally this week, but the overall losses are still significant.

The suddenness and severity of the decline has caught almost everyone completely off guard. It has been widely reported that computer driven trading based on trends and pre-programmed algorithms have contributed greatly to the extreme volatility. In the more recent stages of the selloff, the heavy downward pressure has been driven by forced selling as margin calls and strategy liquidations have occurred, en masse. For now, the forced liquidations appear to have worked through the system.

Goldman Sachs recently published a study of the typical pattern bear markets follow. The study divides bear markets into three categories – structural, cyclical, and event-driven.

  • “Structural” bear markets are caused by price bubbles such as the tech bubble and the housing bubble, which led to the 2008 financial crisis. Structural downturns tend to be the most severe and long-lasting.
  • “Cyclical” bear markets are caused by a normal contraction in the business cycle. Cyclical drops tend to be less severe and less prolonged than structural drops.
  • “Event-driven” bear markets are caused by unforeseen external shocks, such as 9/11, wars, or commodity supply shocks. Event-driven declines tend to be sharp but less deep and typically bounce back much more quickly than structural or cyclical bear market. The COVID-19 panic clearly fits the “event-driven” description. So, we expect the market to rebound as we adjust to the impacts of the virus.

COVID-19 is a world-wide medical problem. Our interconnected global economy and travelling people make the transmission of this sort of virus quite simple. Anyone infected with the virus can carry it anywhere they may go and we’ve learned that it is easily transmitted and it is a killer, particularly for the sick and elderly. For the economy, though, the policy cure of social distancing, may be equally as damaging.

On top of the COVID-19 crisis, and of particular concern for those of us in Texas, oil prices have collapsed as the Saudis and Russians failed to reach a compromise on production. Since the beginning of the year, oil prices declined from $63 to $20 at its worst. This is almost a 70% decline in a matter of months.

What to Expect.

So, we are in a rough patch for sure and it will take some time to recover from these dislocations and uncertainties.  Information and opinions are changing and evolving at a rapid pace. We are doing our very best to follow these developments as they occur. Here are brief summaries of our current read on the financial markets and economy.

Economy – It is beginning to appear that the economic impact of this crisis could be severe, especially in the near-term. Most economists believe that a recession is imminent, if not already underway. Estimates for the drawdown in GDP over the coming months ranges between 5-20%, with the potential for a swift recovery in the second half of the year. Full-year GDP is expected to fall by 2-5%. The Federal Reserve has stepped in to inject liquidity into the financial markets. Congress is working on a stimulus bill estimated to be worth $2 trillion to provide relief to families and businesses affected by the shutdowns. Between the Fed and the government, an enormous amount of support is coming.

Stocks – Broadly, stocks have lost about 1/4 of their value since hitting all-time highs just last month. The decline has been abrupt and has reached just about every corner of the market. But, by almost every measure, the market now looks oversold. When selling subsides, we expect a rapid bounce back, at least for a good portion of the losses. Longer-term, it may take two to three years for the markets to fully recover. As the chart below describes, following the 2008 financial crisis, an all stock portfolio took three years to recover from the lows of 2009. By contrast, a 60/40 portfolio took about a year and a half.

Disclosure: This graph is not recommending any investment, source JPMorgan.

Bonds – Bonds have been negatively affected in recent weeks as well but have not declined as much as stocks. Most commentators believe that the decline in bond prices is a function of forced liquidations and an overall rush to cash. Due to their structure and priority over stock in repayment, bonds tend to bounce back very quickly after declines as things moderate in the market.

We are still very much of the belief that “this too shall pass,” but relief in the form of a full recovery is not likely to come as soon as any of us would like. Beyond the human and safety toll the spread of the disease has created, the public policy response of having everyone stay home and avoid public places has effectively halted business activity.

What we need is some good news. Fortunately, the Federal Reserve and Congress are in the process of focusing powerful monetary and fiscal stimulus into the economy. Their actions should soften the blow to the economy and reverse some of the short-term anxiety that we’ve seen in the markets. Perhaps more importantly, there are legions of the world’s best scientists focused on studying the disease, which should lead to a much better understanding and eventual better treatment options and vaccine developments.

What to Do. Our Advice

Stick to Your Plan. For those of you who are clients at Horizon Wealth Advisors, you are operating with a strategic investment policy designed to help you achieve your long-term goals. The financial projections that we prepare for our clients are all modelled with market returns like we are experiencing right now, so while it’s shocking it’s not really unexpected.  As hard as it is to overcome the fear of further losses, the market is on sale right now and the best long-term plan is to stay the course and perhaps to also be a buyer.

Don’t Panic. We don’t think it is ever a smart move to sell into a panic. If you were to reduce your stock exposure now, you are not likely to be in position to benefit from the rally when it occurs. If you can be patient, we expect your portfolio will recover over time. Also, given the speed and severity of the decline, it is quite possible that the initial bounce back could be very rapid as well.

Ignore the Noise. The news is laser focused on what’s happening in the moment and the more sensational they can make it, the better. It’s particularly difficult in times like this to avoid the din of breathless reporting. If you can’t ignore it, please take it with a grain of salt. There’s always more to the story than what shows up on the nightly news.

Have Faith. We live in the greatest country in the world. Through grit, determination, and spectacular innovation we have risen to every challenge we’ve ever faced. Likewise, the stock market has overcome every set back to eventually reach new highs. There is no reason to think that our economy and the financial markets won’t continue to adapt and grow well into the future.

We‘re Here to Help. Our routine processes are designed to keep your plans on track to meet the needs of you and your family. As always, we are happy to discuss your plan and make any necessary changes. If you would like a plan update, please contact us and we’re happy to do so. We are also here to talk anytime you like about the market, economy, or your portfolio. Consider us your “on call” experts. We would like to keep you on track.

Owen Murray, CFA
Owen Murray joined Horizon Advisors in 2005. As a core member of the wealth management team, Owen is principally involved in investment research and portfolio construction.

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