Last week U.S. equities staged a significant relief rally with double digit percentage gains driven in part by oversold conditions and by announcement of record amounts of fiscal and monetary policy stimulus. For the week, the Dow Jones climbed 12.8% while the S&P 500 and Nasdaq Composite gained 10.3% and 9.1%, respectively. Despite the rebound, equities broadly suffered their worst quarter since 2008 with the Dow and S&P 500 still down -21.8% and -18.3% so far in 2020, and many market participants remain skeptical that equity markets have found a bottom as the extent of the economic damage from the coronavirus pandemic has just started to be revealed. One of the first indications of the economic impact here in the U.S. was last Thursday’s weekly unemployment claims that surged from 282,000 to 3.283 million, almost five times the previous record of 695,000 in 1982.
Unprecedented times call for unprecedented measures. In an effort to bridge the gap in personal and corporate income that will be lost during this period of economic disruption, U.S. Congress passed the largest economic relief package in American history totaling nearly $2 trillion. For perspective, that amounts to about 10% of projected U.S. GDP in 2020 compared to the American Recovery and Reinvestment Act of 2009 that amounted to $831 billion (5.5% of 2009’s GDP) in the wake of the global financial crisis.
For its part, the Federal Reserve is unleashing unlimited quantitative easing that will allow it to purchase assets across a range of credit markets, including corporate and mortgage bonds, thus supporting liquidity and access to credit. Although the coordinated stimulus efforts cannot replace the loss in consumer demand from social distancing measures, they can limit the amount of bankruptcies, layoffs, and closures and support proper functioning of credit markets, which will be key in sowing the seeds of a strong recovery.
In the week ahead, our investment team will continue to monitor the severity of the economic downturn with a focus on updated jobless claims on Thursday and a host of global ISM surveys indicating the extent of weakness in the manufacturing and service sectors around the world. We will also continue to keep an eye on developments in diagnostics, treatments, and vaccines in combating the spread of the virus. Recently, there has been encouraging breakthroughs on several fronts with Abbott Labs ramping up development of a coronavirus test that can identify infection in as little as five minutes and Johnson & Johnson announcing an expedited clinical study that may have a vaccine available by early 2021.
There is a time to grow capital and a time to preserve it. At this moment, we remain focused on preservation mode until we begin to see a clearer picture of global economic data. At the same time, we are looking forward with a long-term perspective and the realization that volatility creates the opportunity to invest in solid companies at much more reasonable valuations. We will continue to keep you apprised of areas of concern and of opportunity and how we are addressing each on behalf of our clients in the weeks ahead.
