As we learned during the Great Recession and, before that, the Tech Bubble, the worst thing to do in times of crisis and heightened market volatility is to panic and cash out. Investors should stay focused on time-horizons and make sure near-term cash needs are covered. It will be a process, but we’ll get through this.
- As widespread testing for COVID-19 becomes more available, the number of cases in the US will surge. That’s ahead of us. The market will likely bottom before new cases peak, but we have some time before we get there. High profile news such as sports leagues shutting down and celebrities testing positive add to the feeling of dread.
- The travel industry is coming to a full stop while the energy industry is struggling with decreased demand and increased supply. The consumer is hanging in there, but a combination of social distancing and likely layoffs could put consumers at risk near term.
- Recession odds have risen to greater than 50% with earnings projected to take a substantial hit in the first and second quarters of 2020.
- Partisan politics delay much needed Federal response.
- Stock markets are forward-looking. The price action we’ve seen is trying to price in the expected impact of the bad news mentioned, but additional, unexpected bad news can drive markets lower from here.
- South Korea has been aggressive in testing, and after four weeks the nation appears to be on the other side of the outbreak. In Hubei, China province, where the outbreak originated, Chinese authorities reported eight new cases yesterday, the first below 10 since the outbreak began.
- Estimates for the duration of the outbreak are four to eight weeks. If we find a way to bridge the gap through both targeted and broad-based fiscal stimulus, along with monetary policy support from the Fed, we should be able to weather this with earnings and growth recovering in the second half of the year. This is a much different problem than in 2008 when the housing market was underwater nationwide.
- Economic data was strong coming into this. Today’s unemployment claims were the lowest weekly number since 1969; housing, which is where most consumers’ wealth is, was robust and should benefit from lower rates. We don’t have the excesses in the economy as we have seen in previous recessions.
- Policymakers know they need to respond. We’re seeing that today with the Federal Reserve announcing a massive package of bond purchases to provide liquidity to markets. The ECB today announced bond purchases and support to banks. Senate Majority Leader McConnell declared Congress will remain in session next week, so there is hope for a fiscal package.
- Housing: the US housing market is in very good shape; values are at an all-time high, affordability isn’t an issue, the cost to own/refinance continues to come in as rates decrease dramatically and unlike the mid-2000s there is no sign of a bubble. For most Americans, their home is by far their most significant asset; if housing can hang in there, the consumer can too, and they will weather this current storm. We should see a meaningful spike in refinancing activity over the coming months, which should put more cash into the average American’s pocket and thus support consumer sentiment and spending.
- Equities are attractively priced relative to fixed income. The dividend yield on the S&P 500 Index is markedly higher than the yield on the US 10-Year note (about 2.40% vs 0.80%, for a record spread of about 160bps). This is rare and has only happened a few other times over the past 20 years and only anywhere near to the current extent during the worst of the Great Recession when stocks sold off precipitously and bonds rallied sharply. If history is any guide, stocks are not only a much better bet than bonds going forward, but the stock market is near a bottom.
- Liquidity isn’t an issue for the markets today. Yes, risk assets are selling off sharply, but equity and fixed income markets aren’t seizing. More importantly, while spreads have been widening within the high-yield market as investors sell the bonds of more levered companies, most of the pain seems contained within the energy sector; for now, it doesn’t seem the bond market is signaling a more systemic economic event is in the cards, what we are living through is a very significant repricing of risk assets, but not the beginning of a credit or economic shock.
- Policy help should continue to come. The Fed cut interest rates last week intra-meeting and the Federal Government approved an $8 billion+ COVID-19 rescue package. We expect more activity – and more meaningful activity – on the monetary policy and fiscal policy fronts.
- Strong fiscal and monetary stimulus from the US Government.
- ECB monetary stimulus and Eurozone fiscal stimulus
- Coordinated global actions
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, a registered investment advisor.
Tagged: market perspectives, COVID-19, housing market, equities, liquidity, fiscal policy, monetary policy