The shifting landscape for commerce (e.g., bricks to clicks), record unemployment, and the number of businesses that have permanently closed due to COVID-19 creates a degree of economic uncertainty we have not seen since The Great Recession of 2007-09. In this commentary, we will discuss some of these economic challenges, assess how the markets responded in the second quarter, and highlight a few of the most pressing threats and opportunities for investors.
Confronted with the challenges of COVID-19 the Federal Reserve has taken unprecedented actions, including a commitment to buying U.S. Treasuries, municipal, and most recently corporate debt. The chart below depicting the expansion of the Federal Reserve balance sheet highlights the scale of these efforts.
The SECURE Act and recently passed CARES Act in response to the COVID-19 crisis create some unique retirement, tax, and estate planning opportunities. We referenced a number of these in our April Market Commentary. In this planning update, we highlight those most pertinent to individuals and provide additional details. Please contact us or your tax and estate advisors if you have questions on the changes discussed below or other planning considerations.
“The will to win cannot be beat, you gotta wanna win!” -Popular youth sports cheer
The ink was barely dry on the year-end market reviews discussing the tremendous gains of 2019 when investors started to worry about the risks associated with COVID-19. As cases grew exponentially in Europe, and Seattle was first hit here at home, investors raced to reduce risk and, in some cases, panicked. The health and economic unknowns of the virus’ spread led to the steepest stock market drawdown in history and the second worst first quarter ever. In just 27 trading days the Dow Jones Industrial Average fell 37% from its 29,551 high to 18,591 on March 23rd. Certainly previous market corrections have been more severe, but the pace of the decline and associated volatility in stocks, fixed-income, and commodities were historic.
Last week and over the weekend, Federal, State, and local governments increased dramatically their efforts to slow the spread of the COVID-19 virus. The mandated “social distancing” and “shelter in place” measures have heightened the uncertainty for the near-term and potential long-term economic impact of the fight against the virus. This swelling fear of the unknown resulted in the worst week for the markets since the 2008 financial crisis. Given the magnitude of the market corrections to date, we wanted to try to provide some context for the economic and ultimately earnings outlook that is being priced in at current market levels.
We approach this topic recognizing how difficult and tenuous evaluating the current situation is. Also, while we were right to recognize this correction felt anything but average, and thus be measured in our desire to increase clients’ equity exposure, that incremental approach and the preservation of cash is of only limited solace given last week’s continued stock declines.