Coronavirus Crisis

Sam Stovall, CFRA Chief Investment Strategist: "The only thing a bull market fears is a recession."

Summary — In early 2020, the coronavirus pandemic caused the stock market to plunge, with the S&P 500 losing a third of its value in just over a month, creating widespread economic fears. To stop the decline, the government and Federal Reserve took drastic actions, including lowering interest rates and providing financial support to businesses and individuals. These efforts quickly turned things around, and by late March, the market began to recover. However, the massive amount of money used to address the crisis might create challenges for future generations.

The COVID-19 pandemic triggered a fast and furious bear market in early 2020. The S&P 500 peaked at 3,386.15 on February 19 and troughed 33 days later at 2,237.40 on March 23, marking a 34% loss in market participants' equity wealth, equivalent to $6.7 trillion, in weeks (i).

Widespread fear, gloom, and uncertainty abounded as pundits and media outlets rivaled the global outbreak to the 1918 Spanish Flu. They warned of an impending economic depression, sparking unprecedented government interventions to stabilize the financial markets, including massive fiscal stimulus and central bank actions. As the crisis developed, investors wasted no time in adjusting their positions, flocking to safe-haven assets.

Companies faced severe disruptions and dire scenarios, requiring resilience and a do-or-die approach, though the outcome remained uncertain. Widespread fear, gloom, and foreboding spread as pundits and media outlets likened the situation to the 1918 Spanish Flu, warning of an impending economic depression.

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The Federal Reserve and the U.S. government took swift and unprecedented measures to stabilize the financial system and support the economy[ii]. On March 15, 2020, the Federal Reserve announced a comprehensive suite of actions, including cutting the federal funds rate to near zero and initiating large-scale purchases of Treasury and mortgage-backed securities to ensure market liquidity and support credit flow to households and businesses[iii]. Additionally, the Fed introduced emergency lending facilities to support various sectors, including commercial paper and corporate bond markets. It provided swap lines to foreign central banks to ease dollar funding pressures.

Simultaneously, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allocated up to $500 billion to support Federal Reserve programs and provided direct financial assistance to individuals and businesses. In conjunction with fiscal stimulus packages and helicopter money (direct payments) to households, the implemented measures were pivotal in restoring investor confidence and stabilizing the markets. The synchronized response from monetary and fiscal authorities proved instrumental in curtailing the market's rapid decline and laid the groundwork for the ensuing recovery, as evidenced by the chart demonstrating the swift resurgence of the S&P 500 beginning on March 23, 2020.

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The Turn

For professional traders and institutional investors, betting on the market's bottom was a bold move. The tide shifted suddenly, and big-money players recognized an opportunity to take a stand. The futures sank to 2,174 (the lows) on March 22 at 5 p.m., Chicago time. Heavy buying occurred the following day, around 2 p.m. on March 23, signaling institutional resolve in the face of capitulating sellers. After the market closed at 2,237.40 on March 23, the S&P 500 opened at 2,344.44 the next day, rocketing up by 9.4% to close at 2,447.33. By April 20, the stock market had rebounded 20%, marking the official start of a new bull market (Source: St. Louis Federal Reserve).

The fix was in. Helicopter cash ruled the day. Money was conjured out of thin air as the Federal Reserve became the eternal printer, showering Americans with liquidity. Financial assets soared, housing prices firmed, and the Fed’s coffers swelled to unprecedented levels in history.

Who’s left to clean up the mess? Certainly not today’s leaders. How about the elites? What about the baby boomers, or the self-absorbed tech moguls and celebrity influencers? Nope. It’s the next and future generations who are doomed to pay the price, inheriting the spoils of a broken system.

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IMPORTANT DISCLAIMER: The opinions made herein are for informational purposes and are not recommendations to any person to buy or sell any securities. The information is deemed to be reliable, but its accuracy and completeness are not guaranteed. 1st Discount Brokerage does not accept any liability for the use of this letter.?Readers of this letter who buy or sell securities based on the information in this column are solely responsible for their actions.

[i] https://fred.stlouisfed.org/series/BOGZ1LM193064005Q

[ii]https://www.brookings.edu/wp-content/uploads/2021/03/Pandemic-era-Federal-Reserve-Facilities.png?resize=2000,1801

[iii] https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm