In the early stages of the pandemic we held hope that there was a possibility that, like some other advanced nations such as South Korea, Singapore and Taiwan, our government and our people would come together to mostly contain the virus without very large or lasting costs. Now, however, the U.S. leads the world in Covid-19 cases. This is a crisis where the great strengths of our country— our prosperity, economic vitality and our freedom—rather than protecting us, made us more vulnerable. The vast size and complexity of our economy and our society left us particularly exposed to a global pandemic.
Now that we are fully aware of the nature of the virus, however, the United States is entering a new phase where its great strengths can again be mobilized to fight the virus as it begins to peak. JP Morgan CEO Jamie Dimon in his recent annual letter summed up the strengths of our county that are being called forth by this crisis:
“America is still the most prosperous nation the world has ever seen. We are blessed with the natural gifts of land; all the food, water and energy we need; the Atlantic and Pacific oceans as natural borders; and wonderful neighbors in Canada and Mexico. And we are blessed with the extraordinary gifts from our Founding Fathers, which are still unequaled: freedom of speech, freedom of religion, freedom of enterprise, and the promise of equality and opportunity. These gifts have led to the most dynamic economy the world has ever seen …It has and will continue to be a beacon of hope for the world and a magnet for the world’s best and brightest.”
We are starting to see these strengths emerge as the whole government and private sector have come together to address the crisis. Though we still have all lot of work to do, our medical system is rapidly developing faster tests and treatments and building emergency hospitals while manufacturers are increasingly churning out protective equipment and ventilators. Our country also has tremendous tools available through our social safety net and fiscal and monetary policy to reduce the possible severity of a recession, and this is what sets us apart from much of the rest of the world.
But with our society likely on lock down perhaps for the rest of the month, where does this leave the economy and the market for now? Most economists now forecast a rise in unemployment and a sharp decline in GDP. The most dire warnings are drawing parallels to the Great Depression, citing the speed of the stock market decline and the expected high unemployment.
There are some key factors that makes today’s situation completely different from the time of the Great Depression. In 1929 there was no unemployment assistance, Medicare, Medicaid or Social Security. The Federal Reserve was in its infancy and was almost entirely ineffective, and the government took a fiscal policy that was almost certainty counterproductive. The social safety net that we now have along with our sophisticated fiscal and monetary tools have made recessions far less frequent and less severe in the period after World War II than in all previous eras. Though many individuals and businesses, particularly small businesses, will be impacted by this crisis, as part of the wealthiest and most sophisticated economy in the world, we have the resources to outlast the virus. And when it is all over and we return to work, there will be a tremendous rebound as all the pent-up consumption springs back into action.
When we think about the workings of the economy and the rise and fall of the markets, we often think in terms of a machine. The market is “firing on all cylinders” or “running out of gas,” we say. A better model though is to think of the market in terms of stories. There are narratives that we tell ourselves personally and as a whole society that ultimately drive our economic behavior and the way we value assets. This is a theory that was put forth recently by Nobel economist Robert Shiller in his book “Narrative Economics: How Stories Go Viral and Drive Economic Events.” In times of panic we lose faith in the old narrative and desperately try to cobble together a new one. Amid the confusion, the story that emerges tends to be a grim one, and it takes hold of the market for a time. This is what’s happening now. With so much uncertainty and panic in the market, the mechanism for valuing assets is temporarily broken and so everything goes down together, the good along with the bad.
What will ultimately spur the rebound may not be so much the level of interest rates, GDP or unemployment, but when a new, more positive narrative starts to take hold and spread. This will be the story of the U.S. as still the world’s most dynamic and resilient economy, a sleeping giant that will soon come back to life and begin doing what it has always done: growing and innovating and solving problems all over the world. It is extremely hard to time a rebound so staying mostly invested and diversified will help ensure that you can participate in the recovery when it comes.
Let’s examine a few helpful charts to support our underlying thesis to Stay Invested…
The Cost of Missing the Best Days in the Equity Market
In volatile times, it may seem like your best move is to exit the equity market. However, consider the high costs of getting out at the wrong time. As history has shown, stocks are unpredictable and missing the best days can prove detrimental.
The Cost of Being Early
Timing a market bottom may be difficult (or impossible), but history tells us that the penalty to buying early requires investors to endure only a short period of patience before being made whole again. As the chart shows, investing 5% before the market bottom has, on average, added just 3 days to an investor’s recovery period. Investors with the ability to enter early may take advantage of deep discounts to begin positioning for the recovery.
Helpful Financial Planning Tips
Required Minimum Distributions Suspended
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that 2020 required minimum distributions (RMD’s), including distributions for a required beginning date in 2020 and distributions for a required beginning date in 2019 that have not yet been made in 2020, are waived for qualified plans and IRA’s. This is primarily due to the decimated market values.
RMDs for participants who turned age 70-1/2 in 2019 and have not yet received their 2019 distribution also may be waived. Beginning in 2020, the SECURE Act changed the new age at which RMDs must start to age 72. The increase in age does not apply to individuals who turned 70 ½ in 2019.
Qualified Charitable Distributions (QDCs) from IRAs are not affected by the SECURE Act; as a result, QCDs may still be taken from IRAs as early as age 70 ½ in 2020 and later.
What We’re Reading
Bank of America says the lows for stock prices and corporate bonds are in…(link)
The coronavirus epidemic will get much worse in the United States in the coming weeks. But where the stock market is heading is much less certain…(link)
The traditional 60/40 portfolio is down 20% for only the fourth time since World War II…(link)
For the Month Ending 3/31/2020 (Cumulative Returns)1
Did you Know?
125 Ideas to Keep Kids Entertained During the Coronavirus Crisis
Whether you’re a stay-at-home parent or you’re working from home, there are plenty of ways to keep the whole family from going stir-crazy. In fact, here are 125 ideas for kids to avoid cabin fever during the coronavirus pandemic… (link)
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate (NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.