Hello again in less than a week! I’m opting for a zen-looking image for a little bit of calm. Reminding us all to breathe . . . three feet away from the nearest person.
In light of the social distancing protocols, I want to make sure you all know that I am able to work from anywhere, as is my assistant Wilbert, as well as the staff at LPL in San Diego, Boston, and Fort Mill SC. We have always had robust contingency plans in place. So you should never see a significant delay in contacting me or someone at LPL.
On to the events of this week:
Fears over the spread of COVID-19 sent stocks in the US and around the world into bear markets. Thursday’s nearly 10% decline in the S&P 500 Index was one of its worst days in history and the largest one-day percent decline since the 1987 crash. What makes pandemics even more striking than other crises is that they are felt by everyone: nearly all major events have been cancelled, major sports seasons postponed, and travel restrictions imposed. Many employees are being sent home to work remotely, planes are empty, and shoppers are staying away from stores and restaurants.
These significant efforts to contain the outbreak are the same actions that will impact the US economy. Just a few weeks ago, the economic environment was strong in the US and improving around the world. Now, as we head into the second quarter, economic slowdown is a reality and the odds of a recession are increasing. That said, in our view, the markets have largely priced in these recessionary outcomes.
We think some context here is important. Fear, as a core human emotion, is magnified when threats arise unexpectedly and quickly. The speed and scope of recent events have driven the outsized reaction from the markets. In fact, the S&P 500 Index took only 16 days to go from its highest point to a bear market (measured as 20% off the recent highs). This is an all-time record, topping the previous record of 28 days in 1929. Many investors have never seen jarring moves like this before.
One potential positive from stocks falling this quickly is they have also tended to stage more powerful rallies off the lows. For the bear markets since World War II that saw 20% or more declines within 270 days, the S&P 500 tended to bottom more quickly and recorded shallower declines. On average, these quicker bears averaged a 26% loss, compared with the average bear market decline of 33%. Given this was the quickest bear market ever, it is reasonable to think a strong reversal might be possible.
The great news is that the US economy was very healthy before this three-week stretch of steep market declines, with employment strong and the unemployment rate near 50-year lows, solid job and wage gains, corporate profits poised to accelerate, and company balance sheets in excellent shape. This bodes well for a faster rebound on the other side. As with illness, the healthier you are beforehand, the faster you tend to recover.
The tried-and-true advice we give is to stick to your investment plan. The only thing worse than not having a plan is abandoning the one you have. The stock market has already suffered declines similar to those associated with mild recessions. That doesn’t mean stocks can’t go lower. It just means that the opportunity for long-term investors is getting more attractive. While markets continue to face a crisis of uncertainty, we have unwavering confidence in the long-term fundamentals and prospects for the US economy and corporate America.
And if you’ve read this far, it’s time for a mildly amusing video pep talk from LPL CFO Burt White:
How Do You Survive an Attack from An Anaconda?
Please stay healthy and contact me if you have any questions or concerns.