The Covid-19 virus has peaked and for now is waning thanks to the many citizens who have followed admonitions for social distancing and the heroic actions of many front-line emergency responders, non-profit volunteers and health professionals. The pandemic has taken the lives of over 56,000 people in the U.S. and the mitigating efforts have brought our economy to a standstill. Government officials responded with trillions of dollars in stimulus which has bought us time. A second small business amount was approved by Congress and further stimulus is being requested, including relief for lost revenues for state and local municipalities. Now the challenge for policy makers is how to manage the delicate balance of public safety with restarting the economy.
The economy is in a severe recession with soaring unemployment. After the stock market hit its all-time high in February, it went into free fall to enter bear market territory in record time bottoming out on March 23. Since that low point the market has rallied over 30%. The rally has occurred with significant volatility as investors reenter the markets and computerized trading models react to invest or take profits at various market level targets. A 500-point swing in the Dow used to be cause for great jubilation or agony, depending on the direction. Now we routinely witness multiple 500-point swings within a week’s time.
The breadth of the malaise covers many different asset categories. Bond markets and related prices were disrupted. The Federal Reserve stepped in and purchased billions of bonds to stabilize the markets. Developed country and emerging market international stocks are struggling. The oil market suffered and the price of crude dropped below $0. Although the technical reason for this nonsensical outcome had much to do with complicated financial instruments, consider a scenario where oil tankers deliver oil on scheduled contract dates, but due to the lack of demand with almost no one driving or flying, buyers have no place to take possession of the oil and sellers have to pay to find alternative storage for the delivery. Instead of receiving payment for the oil, sellers had to make payments, leading to an oil price of -$37 per barrel, something that has never happened before. The ultimate solution to stabilize oil markets is to reboot the economy which puts cars and trucks back on the road and increases demand.
Opinions vary widely and change rapidly in how we reopen businesses without triggering a second-wave outbreak. There are also varying expectations on how high the markets will respond and how rapidly the economy will recover.
Because we have historically rebounded from every recession, war, financial turmoil, political unrest, Y2K, terrorist attacks, and multiple viruses (Spanish Flu, Asian Flu, AIDS, MERS, SARS, Ebola, H1N1, Zika, etc.) in the past, we are optimistic that we will overcome this crisis as well. However, we believe that more pain and volatility lie ahead as investors evaluate the successes and setbacks that arise. We will continue to evaluate risks to existing holdings and look to mitigate or lower overall risks where appropriate. At the same time, we will also look for companies that are more financially sound, in higher demand, or appear oversold to make opportunistic purchases for your portfolio.