Stock markets rallied more than 10% last week, following two weeks of substantial declines related to the ongoing concerns about COVID-19. As of Friday’s close, the S&P 500 Index had declined 14% for the month of March and was down 21% for the year. Prior to the recent rally, the S&P 500 had declined more than 32% from its recent peak on February 19. Occurring in just one month’s time, this has been the fastest price decline in stock market history, as illustrated in the chart below.
SPEED OF PRICE DECLINES
COVID-19 continues to have a significant impact on public health and global economies. The virus has now made its way to over 190 countries globally, with more than 700,000 reported cases and over 30,000 reported deaths.
Information about incidence and mortality rates is improving, as monitoring and testing capabilities expand. Abbott Laboratories received FDA approval on Friday for a rapid testing device that can determine in less than five minutes whether someone is infected. The company plans to provide 50,000 tests per day starting on April 1. In the U.S. the spread of the virus continues to slow in hot spots like Washington and New York, yet infections continue to be identified in other states such as Florida and Louisiana. Unfortunately, it appears that the U.S. is on course for an outbreak worse than what other countries have experienced thus far.1
The economic impact of COVID-19 has been substantial. While it is too early to know the full extent of the damage on U.S. economic activity, below are some of the headline statistics that help size the potential.
- Currently, 14 states have required the closure of nonessential businesses, 23 states have implemented stay-at-home orders, and nearly all states have implemented some form of restriction on public gatherings.2
- The number of people passing through airport security was down 89% year-over-year last week.3
- The national average hotel occupancy rate dropped to 30% last week, compared with 87% in the same week a year ago.4
- Initial applications for unemployment insurance spiked to 3.28 million last week, dramatically higher than the 211,000 claims reported two weeks ago and even well beyond the previous record high of 695,000 experienced in October 1982.5
Further economic reports in the coming week will provide initial insights into the impact on consumer confidence, manufacturing activity, the service economy, the unemployment rate, and wage growth.
Monetary policymakers and federal legislators have been very active in providing support to financial markets and the underlying businesses and employees within the economy. The Federal Reserve has dropped its target interest rate to zero, reactivated many 2008-era liquidity programs, and quickly expanded its open-market purchase activity. These measures are extremely important to restore the normal functioning of the financial markets during this time of stress. At the same time, congressional legislators have assembled three different financial relief packages to respond to the current crisis and help bridge the economy through this period of contraction. The largest of these legislations, the CARES Act, was officially passed on Friday and provides over $2 trillion in support targeted to the most directly affected parts of the economy.
Financial markets seemed to have stabilized last week. Market liquidity started to return to more normal levels, with the securities price gaps between buyers and sellers contracting and new securities issuance resuming. Forced selling seemed to have slowed, as leveraged investors received some relief from daily margin calls caused by the rapid decline in the markets during the prior weeks. Sector rotations reversed to some extent, and relative gains slowed in stocks that were perceived as “stay at home” beneficiaries. Various other indicators provide further positive signals, such as a rebound in inflation expectations while government bond yields were also declining; stabilizing oil and copper prices, and a weakening in the U.S. dollar. None of this suggests that the stock market has bottomed, but rather that financial stress has eased and will allow investors time to better assess the impact on economic activity and corporate earnings. For instance, credit spreads remain at elevated levels, as they should due to uncertain and weakened fundamentals in most business sectors.
While the current environment is stressful and uncertain, we are beginning to see many compelling opportunities for long-term investors across multiple asset classes. High-grade corporate bonds are now offering yields more than 2% higher than government bond yields. Lower-quality corporate bonds have yields north of 9% above government bonds. High-quality municipal bonds experienced a brief but extreme dislocation in recent days, with yields more than 3% higher than government bonds. On top of compelling underlying yields, fixed income closed-end funds also are trading at substantial discounts to their net asset value. High-quality stocks are trading at more reasonable valuation levels than we have seen in several years. Small-cap stocks have declined more than large-cap stocks and are presenting very compelling risk/reward trade-offs, given their tendency to have higher growth rates and less economic sensitivity. Stocks in certain sectors are severely depressed, such as bank stocks, which are now trading at valuation levels even lower than what occurred in 2008.
Positive Long-Term Outlook
In summary, we continue to stay the course with a disciplined, long-term investment approach. For confidence in an economic and financial market recovery to increase, investors will need to see a decline in the pace of COVID-19 infections and the start of a return to more normal business activity. The economic damage clearly will be severe, but its breadth is unknown and the duration of its impact is still to be determined. Market volatility may remain elevated until the range of potential outcomes begins to narrow and investors can see light at the end of the tunnel. In the meantime, we continue to take opportunities to slowly and selectively increase risk back into portfolios in accordance with each client’s long-term goals. We recognize that corrections and bear markets are a normal part of investment cycles and can create attractive buying opportunities for investors that are long-term focused and willing to take on risk while others are fearful.
2 USA Today, March 27, 2020.
3 Transportation Security Administration, Pantheon Macro.
4 STR Inc, Pantheon Macro.
5 Department of Labor, FactSet.
The opinions and analyses expressed in this newsletter are based on RMB Capital Management, LLC’s (“RMB Capital”) research and professional experience, and are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. The S&P 500 Index is widely regarded as the best single gauge of the U.S equity market. It includes 500 leading companies in leading industries of the U.S economy. The S&P 500 focuses on the large cap segment of the market and covers 75% of U.S. equities.