The blue bars in the chart below show returns since their 52-week peak. The green bars show returns since their 52-week trough, as of March 31st. Across asset classes, we have seen sharp declines followed by a recent recovery. This has all happened on the back of lower rates and aggressive stimulus programs announced in late March. Despite the recent rally off the lows, we believe the fear of missing out should be resisted and instead we must let objectivity guide us.
Bear markets, have often featured rallies as investors get more optimistic around both monetary and fiscal support. However, often these are rebounds that precede new bear market lows. The chart that follows shows bear markets for the S&P 500 in 2000-2002 in blue, from 2007-2009 in green, and the current bear market in yellow. What we see is that in the prior two bear markets, there were substantial rallies before indices made new lows. In 2000, we saw a bear market rally of 21%. In 2007, we saw a bear market rally of 24%. So Through March 31st, we had seen a 17% rally and despite the speed it has happened, it remains entirely possible that the recovery we are seeing in equity markets is merely a bear market rally.
With the economy in a recession and the need for a more real-time time view of economic activity, the NY Fed created a weekly economic index to track 10 higher frequency leading indicators in response to COVID-19. The chart you see below shows that economic activity in the US has taken a nose dive. This should not come as a surprise considering the lockdowns now in place around the country to combat the spread of the Coronavirus.
This plunge in economic activity has flowed through to the US Labor Market. As of the end of March, the unemployment rate jumped to 10.5%, which eclipsed the financial crisis and is the highest level we have seen since 1982. While the payroll numbers and unemployment rate represent large changes compared to where we were to end 2019, what is more, jarring is the speed at which it has happened. Take a look at the chart below.
The axis on the left shows the initial unemployment claims during recessions. The axis on the right shows the duration in months of recessions. During the financial crisis (2007) the economy saw 40 million initial unemployment claims over the course of 18 months. By comparison, we have seen unemployment claims at 10 million in less than 2 months on the back of COVID-19. All before we add the additional 6.6 million new claims reported in today’s unemployment report. The job losses and the speed they have occurred is truly unprecedented.
The earnings picture in the US certainly supports the view that earnings in developed countries are likely to take a major hit, at least in the short term. The charts below show the last three times we had earnings recessions in the US.
The two charts on the left look very different from the one on the right because the dark blue lines indicate falling earnings growth expectations throughout the year as analysts revise their optimistic expectations. When this happens, usually the subsequent year sees a slashing of earnings growth projections as well. The panel on the right is different though. It shows 2020 earnings growth expectations falling off a cliff. At the same time, they have made virtually no adjustment to 2021 earnings growth expectations. This tells us that despite a dismal earnings picture for the remainder of this year, analysts appear to be taking the view that the earnings growth hit is transitory and they are betting that we see a recovery next year.
Our view is that while it is certainly possible, it is by no means guaranteed. It is simply very difficult to predict with any precision the timing on an earnings recovery, or an economic recovery for that matter considering today’s looming uncertainty.
Until then, we urge investors to balance the optimism from the recent market bounce with the risks that the economic recovery could take longer than expected despite unprecedented stimulus.
Weekly Global Asset Class Performance
Over the last several weeks, the team at STA Wealth has attempted to keep our clients apprised of updates related to the markets, economy, government, tax, retirement and other changes impacting us during this difficult time. As the Coronavirus (COVID-19) pandemic continues to spread, its impact on businesses and individuals has been significant. Stay up-to-date on the latest news with this Coronavirus Resource Center as your go-to resource for commentary, news, and other resources. Bookmark this article to check back regularly for updates.
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