Respecting the Unknown While Using History & Evidence as a Guide

by Catherine Trinder Miller, March 17, 2020

Key Takeaways:

  • Restricting activity in the short-term has the greatest potential to limit longer term economic declines.
  • Congress is negotiating a substantial $1.2 trillion financial bridge to recovery supporting individuals, companies, and industries most affected.
  • Financial markets are forward looking: stock and bond markets have priced in a recession.
  • High-quality assets in stock, corporate bond, and municipal bond markets are on sale.

As negative headlines compound, and short-term economic prospects deteriorate, we are appropriately respectful of the things we don’t know. The most sobering unknown is the footprint of COVID-19 in our communities and country. Thankfully, bottlenecks to testing are subsiding and those affected will be identified and treated in coming weeks.

The most alarming headlines this week preview a sudden stop in the economy by restricting activity. It is unsettling. It is unprecedented. Yet, it is necessary to get to the other side of this exogenous economic shock as soon as possible. As I conducted channel checks this weekend surveying restaurant activity in my local community, and connecting with others nationally, patronage seemed unusually high given the potential transmission risks.

We have precedence guiding what has worked in regions battling this virus before us, including China, Hong Kong, Singapore, and Japan. In these communities, restricted activity decreased the spread and truncated the duration of the economic shock. It is in this knowledge that I am perhaps strangely comforted to see the actions announced in the U.S. this week restricting activity at the national and local level.

In a White House press conference Tuesday, Dr. Anthony Fauci, the nation’s leading infectious disease expert, indicated a possible peak in transmission in 45 days. This is based upon his team’s expertise and the experience of preceding regions. If correct, this would imply a short term economic disruption. As the percentage change in number of daily cases declines even before we reach peak cases, the market will likely discount this through stabilization in equity prices. A financial bridge supporting companies and individuals most affected will be required to smooth the path to recovery.

The government is acting. The $8.3 billion stimulus package approved to date is to fight the pace of transmission and prevent and treat the virus. The bridge investors and Americans are seeking was announced in concept Tuesday in active discussions between Treasury Secretary Mnuchin and Senate leaders. The size is the equivalent of 5% of U.S. GDP or $1.2 trillion. The strategy is to target the aid where most needed: individuals, companies, and highly-affected industries.

We can’t sugar coat it – the short term hit to the economy will be significant. Yet, should Dr. Fauci’s estimated 45 day path to peak reported cases prove generally correct, the prospects as we look beyond the second and third quarters of this year are expected to brighten. Some purchasing will be lost, but most will be deferred and pent up demand will build. The stock market looks ahead. Should the magnitude of economic decline decrease from the second quarter to the third, the stock market will anticipate this and asset prices could move higher even as the economy is still slowing.

We are seeing recovery in activity in Hong Kong, Singapore, Japan, China, and even the hardest hit region, Wuhan. As some regions including Europe and the U.S. brace for escalation of this health crisis, others are recovering, including the second largest global economy, China.

Using history as guide in previous recessionary bear markets, the S&P 500 has declined approximately 33% on average, with a median decline of 24%.1 Monday’s price decline registered a 30% fall from peak in only 16 trading days. The fastest decline in history. Both the credit and equity markets are pricing in recession. This is not 2008. The health of our economy, financial system, and consumer are meaningfully better going into this crisis.

The importance of what we don’t yet know – the footprint of the virus in the U.S. and therefore the duration of the economic shock – keeps us measured and patient in reallocating capital. Headlines and data in the near term will be negative. We would be foolish to attempt to call a bottom. Yet, we do feel the majority of the price declines are behind us. For long-term investors, we are finding quality assets in the stock and bond markets trading at highly discounted prices.

Since the 1930’s, investors were happy if they invested after the red lines 100% of the time (see exhibit below).

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Any opinions are those of Financial Advisors Catherine Trinder-Miller and Theresa N. Benson, CDFA and not necessarily those of Raymond James. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making an investment decision and does not constitute a recommendation. All opinions are as of this date and are subject to change without notice.

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