About a month and a half ago on March 16, two things happened: 1) the S&P 500 dropped 12% and; 2) we hosted a conference call to discuss our outlook regarding COVID-19, the economic impact of containment efforts, and the market’s response. At the time, we knew with certainty that our nation’s experience with the virus and the resulting economic impact would get significantly worse in the days and weeks ahead. We noted that the market’s response would be much less predictable in the short term and advised our clients to stay disciplined.
Flash forward to today. Risks remain extremely elevated, but the market has rebounded 30% from recent lows and there are indications that some of the worst days are behind us with respect to COVID-19 and the economic damage from containment efforts. Below, we provide our updated perspective on the disease, the economy and the market.
The Disease – Approaching Global Stabilization
As of this writing, there are over 3.2 million COVID-19 cases and over 220,000 deaths confirmed in 185 countries around the world. These numbers continue to climb higher, but growth is decelerating in key geographies including the US. COVID-19 was originally identified in Mainland China on December 30, 2019 and the country surpassed 500 cases by January 22. The virus then migrated to Europe, which surpassed 500 cases by February 26, and the United States, which surpassed 500 cases on March 8.
In the accompanying charts, we use the 500 case threshold as a common point in each region’s outbreak. If we can draw any inferences from China’s experience, we can do so with the knowledge that Europe is four to five weeks behind China and the United States is about two to three weeks behind Europe.
Throughout the pandemic, we have been closely monitoring “active” cases (total confirmed cases less deaths and recoveries). We believe active cases are particularly relevant because each active case represents risk in the form of an opportunity to further spread the disease. Active cases in mainland China peaked around 60,000 on February 17 and steadily declined to fewer than 1,000 today. The situation has stabilized in China, though the risk of resurgence remains high.
Europe appears to be turning the corner as well. The gap between total cases and active cases continues to widen and new case confirmations are decelerating across the region. In Italy, the original epicenter and leading indicator for broader Europe, daily case confirmations declined to 2,100 on April 29 from a peak of nearly 7,000 on March 21 and active cases have started to recede from peak levels captured on April 19. Similar patterns can be observed in Spain, France, and Germany, which bodes well for continued regional stabilization.
The US is earlier in the process, though we are seeing early signs of stabilization here as well. Most confirmed cases remain active cases today, but the two have started to decouple. Active cases will continue to trend higher in the near term, with potential to peak sometime in May if containment efforts are effective. In New York, the US epicenter, daily case confirmations declined to approximately 4,600 on April 29 from a peak of more than 11,000 on April 15. In the state of Michigan, daily case confirmations have declined to 1,100 from a peak of 2,000 on April 3.
The Economy – April Showers Bringing May Flowers?
Efforts to limit the humanitarian toll of COVID-19 have come at substantial economic cost. Flowers in May seem like a bit of a stretch, but there are indications that April may have marked the worst period of this experience. The economic picture will be far from rosy in May, but has the potential to be an improvement over April as portions of the economy begin to reopen.
The shutdown of large portions of the economy drove the most sudden and severe shock to ever hit the labor market. In the six weeks ended April 25, more than 30 million Americans (16% of the labor force) filed for unemployment benefits. Importantly, weekly claims peaked at 6.9 million during the week ended March 27 and trended lower throughout April – these outcomes are far from good in absolute terms, but trending favorably.
With regard to actual unemployment levels, the March jobs report (delivered on 4/3) highlighted 4.4% unemployment and 701K job losses, based on survey data from the second week of the month – just before claims spiked. Incorporating recent claims data, we believe the April jobs report (due on 5/8) will reveal unemployment in the high teens, which could very well be the peak. Heading into May, two factors could drive incremental hiring that would begin to reduce the total level of unemployment: 1) employers taking Paycheck Protection Program (PPP) benefits are incentivized to rehire laid off workers quickly in order for loans to be forgiven and; 2) portions of the economy will begin to reopen resulting in job creation.
In addition, US consumer sentiment (University of Michigan Consumer Sentiment Index) declined precipitously throughout March, but appeared to find a bottom in April. Mounting COVID-19 cases, business closures and job losses drove sentiment down 30 points from 101.0 at the end of February to 71.0 by mid-April where it remained at month end. Decelerating jobless claims and stimulus programs are likely supporting current levels of sentiment. The Preliminary May sentiment reading (due on 5/15) will help to confirm whether sentiment has indeed stabilized and may even show some improvement over April as the economy slowly begins a reopening process. If this is the case, we should also see month over month growth in retail sales beginning in May (reported in June).
Whether or not April marks the economic bottom of this experience, most of the fallout is expected to show up in the second quarter. Economists who recently updated their forecasts expect a second quarter GDP contraction of more than 30% (seasonally adjusted annualized rate) with individual estimates ranging from +0.4% to -65.0%. For perspective, the economy contracted “just” 8.4% in the fourth quarter of 2008. Consensus expectations also call for a return to growth beginning in the back half of the year netting a full year economic contraction of about 4% compared to 2.3% growth in 2019. We believe these expectations are directionally reasonable, though significant uncertainties remain.
The Market – Expressing a Cautious Optimism that the Worst is Over
Equity markets are forward-looking by nature. The S&P 500 fell 34% from a late February high of $3,386 — not based on what had happened, but in anticipation of what was expected to happen. This sharp drawdown occurred as investors came to grips with the unfortunate realities that COVID-19 cases would rise substantially, that unemployment would spike, and that GDP would contract significantly.
As of this writing, US stocks had bounced more than 30% from the March 23 low, and remained just 14% below the late February peak. Investors have started to look beyond the medical and economic crises present today in anticipation of brighter days to come. From our perspective, the market may be leaning a little too optimistic given heightened uncertainty and numerous opportunities for the narrative to deteriorate. For these reasons, we expect volatility to remain elevated and believe it wouldn’t take much to retest lows, though the short-term path for stocks is highly unpredictable. In the intermediate to longer term, we think stocks will continue to reward disciplined investors.
Remember, the most important investment decision you will ever make occurs when you and your advisor determine the appropriate high-level asset allocation for your portfolio (simply the ratio between stocks, bonds, alternative assets, and cash). That decision is based on a deep understanding of your unique goals and circumstances, and your ability and willingness to take risk. The short term can be exceedingly unpredictable, but over the long term we know to expect bumps along the way (some larger than others). Don’t lose sight of the fact that your financial plan, and the investment portfolio supporting that plan, were developed with a long-term lens and maintaining discipline during periods of uncertainty is the most reliable course for growing and preserving wealth. Please contact any member of our team if you have questions.
World Health Organization (WHO) Daily Situation Reports
Johns Hopkins University & Medicine Coronavirus Resource Center
National Health Commission for the People’s Republic of China