Market indices rebounded this week by roughly 10% as Congress passed, and the President signed into law the CARES Act. In addition, the Federal Reserve increased its response and has committed “whatever it takes” to ensure the financial markets remain stable. While COVID-19 cases are clearly escalating domestically at an alarming pace, we believe the market has priced in much of the potential damage to the U.S. economy. As seen this week, stocks may be forming a bottoming pattern, but as in past bear markets, volatility should be expected, and the markets may retest the lower bounds.
While we believe the economy is in a recession, 2020 should be different than 2008-2009. The unemployment numbers are undoubtedly shocking. However, the areas currently affected — mainly retail, travel and leisure, and hospitality — represent a considerably smaller share of GDP than the finance and housing industries did then.
The trajectory of the recovery will depend on three factors:
- The spread of the virus
- The extent of damage mandatory closures and “social distancing” inflict on the economy
- The effectiveness of health, fiscal and monetary policy in mitigating the damage
In last week’s note, we introduced the three phases we believe the markets will follow throughout the crisis. The first phase, dominated by elevated uncertainty and anxiety, has been characterized by high volatility and unusual correlations (indiscriminate selling). We now feel that we are nearing the end of this phase and will look to episodic leveling and the effectiveness of the monetary and fiscal responses to provide cues.
Given this framework, we continue to approach equities with patience but acknowledge that the volatility will create opportunities. As a result, we continue to look for occasions to upgrade individual holdings. At the same time, risk management techniques — such as rebalancing and being mindful of sector exposures and concentrations — remain critical as we navigate the current market landscape.
Please feel free to reach out to anyone on your team with perspectives or questions you have. Remember to check Twitter, LinkedIn, and our blog. We will continue to email more comprehensive views as this environment develops.
We thank you for your ongoing trust and partnership and wish you and your family good health.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.