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Always Darkest Before the Dawn Thumbnail

Always Darkest Before the Dawn

By: Rich Cheever

Unprecedented is a word that has been used a lot lately to describe the COVID-19 virus, the impact that it has had on society and the economy, and it is a fitting description of what has been happening in financial markets.  Since hitting an all-time closing high on February 19, the S&P 500 Index* has plunged into bear market[1] territory in the fewest number of trading days – just 22 days[2]  – the fastest in the post-World War II era, according to Payden & Rygel[3].  The volatility has not only affected equity markets, but the fixed income market has seen increased volatility and disorderly market trading.[4]

Starting from an economy that – by most measures – was humming along rather smoothly, we are now faced with the prospects of the U.S. and Global economy entering a recession.  Since we have gone over a decade without experiencing a recession some of us may have forgotten what one feels like.  Expectations are wide-ranging, but what we have been hearing from many strategists is that we are in for a “U”-shaped recession.  A sharp decline as we all hunker down and socially distance from one another, a period of flat economic activity as the recently enacted $2 trillion fiscal stimulus package[5] filters through to consumers.  Dr. David Kelly, JP Morgan’s Chief Market Strategist, calls this a period of economic suspended animation[6].  And finally, as the coronavirus is contained, everyone will burst out of wherever they have been sheltering in place and we will see an upswing from all that pent-up demand (a.k.a. “cabin fever”).

While it might be tempting to just sit out the market until you start to see lines forming at your favorite pub, if history is any guide, that would be a mistake.  Equity markets are forward looking, meaning that investors will anticipate an improving economy.  To illustrate that point, the chart below plots the average level of the S&P 500 Index* around the ending of all recessions since World War II.  There have been 11 recessions over that time.  On average, equity markets bottom nearly four months before the end of a recession. Historically, investors who waited to see improvements in the economy before getting into the market missed the bottom.

GBB Wealth Images 3


[1] https://www.investopedia.com/terms/b/bearmarket.asp

[2] https://www.payden.com/displayfile.aspx?fileloc=802

[3] Seasoned investors may ask, “what about 1987 when it dropped over 20% in one day?”  It is true that the S&P 500 Index* declined over 22% in one day, but the index had already declined from its peak and the events on that day pushed the market into bear-market territory.

[4] https://vanguardblog.com/2020/03/20/bond-etf-discounts-during-recent-volatility/

[5] https://www.cnn.com/2020/03/25/politics/senate-deal-stimulus-checks-coronavirus/index.html

[6] https://am.jpmorgan.com/us/en/asset-management/gim/adv/covid-19-relief-bill-holding-the-economy-in-suspended-animation

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