Intermission

“Although the contemporary crisis is loaded with bad news, this has not been its primary problem. It’s the ‘unknown.’ Give me bad news any day over complete uncertainty.” – Jim Paulsen, March 16, 2020

As I sit here compiling my thoughts about what we just witnessed, what we’re witnessing right now, and what is yet to come, I think it’s best if I layout a scenario that might be helpful to our readers. First, broadly speaking, what have we witnessed and are witnessing? An unprecedented viral pandemic has called for unprecedented actions by the federal and state governments. Shutting down local and national economies by issuing “shelter-in-place” and “essential business only” restrictions is completely contradictory to the freedom we stand for, but potentially the only answer. Scripting a relief bill to the tune of $2 trillion is unprecedented, but again, potentially the only answer. The cause and effect of issuing personal and economic restrictions and then rolling out a bill to relieve stress due to these restrictions, has never been done. We first saw the broad markets sell off due to the possibility of personal and economic restrictions, then as the restrictions were issued, we began to sell off further, and now we have slightly recovered as the federal relief bill has been passed. Of course, I’m hoping the unprecedented government actions “bend the curve” and stabilizes the economy, creating some normalcy in the stock market going forward. Sure, that would be nice, but unfortunately, we need to remain diligent in our investment planning, understanding that we still don’t know how this will playout. The recent bounce we’ve witnessed off the lows in our broad markets might be the start of our long-term recovery, but I’d also like to present a scenario that instead the bounce is simply an “intermission” in a much longer dramatic play. 

I’m from the Government and I’m here to help:

First, let’s talk about the economic stimulus that the federal government and reserve bank has put into place. I think Jim Bullard, President of the St. Louis Federal Reserve Bank, put the federal government’s relief package in the best context, when he described a “normal” quarterly GDP in terms of dollars, in relation to the size of the government bill. While on CNBC on March 25, 2020, he mentioned that a “typical” quarterly GDP number for the U.S. in dollar terms is around $5 trillion (US GDP in 2019 was $21.4 trillion1). In that context, he said that a 50% contraction in the second quarter of 2020, or $2.5 trillion, wouldn’t be that surprising. So, a bill worth $2 trillion, which is what was passed by Congress, is in-line with what we’ll need. That is a very rational way to look at the unprecedented relief package that was just passed. Not every dollar of the $2 trillion will show up in Q2 GDP, far from it, but that number was strategic when the package was put together. 

Here’s a broad overview of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)2:

• $340 billion in emergency funding to contain the outbreak
• Including $117 billion for hospitals and $11 billion for vaccines and diagnostics
• $500 billion in corporate bailout funds
• $260 billion for expansion of unemployment benefits
• $377 billion for a small business rescue plan
• Direct stimulus checks:
• $1,200 for individual tax filers who make less than $75,000
• $2,400 for joint tax filers who make less than $150,000
• An extra $500 for each dependent child

In addition to the relief package that was just passed, the Federal Reserve Bank, the “Fed,” is also coming to the table with an unprecedented bond buying program, on top of the already drastic cut in the overnight lending rate to 0-0.25%. If you’re an investor in individual bonds you’ve seen the discrepancies in bid/ask spreads, making the fixed income markets also unstable. The announcement of the Fed’s purchase program should help reign in spreads and create a more orderly and liquid bond market, as it already seems to be doing. Stability in the fixed income market can have a calming effect on investors as well, when you consider the fact that bonds are historically less volatile than stocks and a place where investors can access capital if, and when, they choose to allocate into the equity markets. 

So, if the bounce last week is just “intermission,” who’s the star of the second act? 

Jim Paulsen’s quote that I used at the top of this commentary is a pretty good explanation for what’s been going on in the markets so far. The uncertainty of this pandemic, and the resulting economic halt, has been the cause for the capitulation in the stock and bond market. We’ve been dealing with “known unknowns” during this pullback, that is the things we know we don’t know. How long until the outbreak peaks, how long until we have a vaccine and/or better course of treatment, how long until we’re out of quarantine, how long will it take for jobs to come back and the economy to recover, etc. There were, and still are, a lot of “known unknowns.” However, the second act of this market “drama” might be the opposite. We know the data will be challenging, as we’ve already seen with last week’s unemployment numbers, and though bad news is probably already priced into the stock market, don’t be surprised if we witness some more downward volatility when the data starts being reported. We know the virus is highly contagious, and again, though bad news is probably already priced in, don’t be surprised if a second wave of COVID-19 creates more downward volatility. My point in all this is that we still don’t know, and won’t know, until we can look back on it. Did we price in a really bad scenario when the S&P 500 hit a 2-year low last Monday?  Probably, but we just don’t know. Remain diligent and stick with your investment and financial plan, as the drama of this pandemic and economic environment might only be halfway over.  

Silver, or Gold, Lining

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.” – Warren Buffett, Berkshire Hathaway’s 2016 Annual Report

I don’t want this month’s commentary to be construed as a turn from optimism to pessimism, far from it. However, I think prudent investing, as well as sound financial advice, is a mix of financial and mental preparation. The fact that we just ended an 11-year bull market, almost to the day, is astonishing. Let’s not allow recent events make you forget what a run we’ve just had. My simple hope in laying out a potential “second act” in this economic crisis is to help our readers mentally prepare for a possible retesting of the lows. Furthermore, if we were to retest the market lows we just set, maybe you should be looking for the skies to “rain gold.” As Nick Murray has eloquently put it, we have yet to end “the greatest secular bull market in this history of mankind, which started around the time those guys gathered under the buttonwood tree in the spring of 1792.”3 If you believe in America, it’s hard not to be optimist about the largest 500 companies in the country (the S&P 500), and the tremendous amount of cash flows they will produce in the future.

In my January commentary I revisited our investment principles, and given the current market environment, maybe I should again. 

From January’s Commentary, “27,653:”

“Our overall principle of investment advice, and hopefully one that you take to heart, is a goal-focused and planning-driven one. This principal sharply distinguishes itself from an approach that is market-focused and current events driven… Long-term investment success comes from continuously acting on a plan, while often investment failures come from continually reacting to current events in the economy and the market…”

If you enjoy this commentary, please feel free to forward it along or share it on LinkedIn. Also, if you’d like for me to cover an economic or market related topic, please let me know. If it’s something I might enjoy writing about, I will certainly consider it. Finally, if you have any specific questions, feel free to shoot me an email.

1 United States (USA) GDP – Gross Domestic Product. www.countryeconomy.com

2 Jess Bidgood and Liz Goodwin, “Senate approves $2 trillion coronavirus relief package,” Boston Globe, www.bostonglobe.com, March 25, 2020

3 Murray, Nick. “The Third Bear Market,” Nick Murray Interactive, April 2020

2020-0729 Exp. 04/30/2021 Member SIPC