by Steve Conard, CFP®
Coming off a remarkable 2019, the US stock market was perhaps destined to take a breather. After a flat January the equity indices gained momentum, posting fresh all-time highs in mid-February before the floor dropped out from under them. From their highs set on February 12th and February 19th respectively, the Dow Jones Industrial Average (DJIA - down 37%) and S&P 500 (down 34%) plummeted through March 23rd before staging a rally to close out the quarter. The DJIA finished the first quarter down 23.2%, while the S&P 500 fell 20.0%. More than a breather, the start to 2020 is the US stock market’s worst quarter since 1987.
Financial markets largely ignored the coronavirus threat until it made its way onto US soil. Still, the initial reaction seemed destined to follow the pattern of previous pandemic threats such as SARS and H1N1, which resulted in mild and short-lived market corrections. It was only after the World Health Organization (WHO) declared COVID-19 a global pandemic on March 11th that Wall Street came to the realization that the necessary policy response would involve shutting down the nation’s economy. And the selloff was on.
The ensuing flight to safety in US Treasury bonds pushed yields to record low levels, but the other sectors of the bond market haven’t fared nearly as well. The looming recession has traders concerned about heightened default risk by businesses and renewed pressure on government budgets, setting off a wave of selling in the corporate and municipal bond markets. Hardest hit are corporate junk bonds, which remain the lone sector within fixed income markets to be excluded from the Federal Reserve’s unprecedented intervention measures designed to provide much-needed liquidity to these markets. While the Fed’s new programs have served to calm the debt markets, the depths to which the economy ultimately declines could destabilize them going forward.
Whether or not the market’s rally over the final week of quarter one can be sustained for long is anybody’s guess, but historical precedent suggests that the market hasn’t yet bottomed. The stock market fell from all-time highs into bear market territory in record time, anticipating economic decline rivaling the financial crisis of 2008. The vast uncertainty surrounding the current crisis makes pricing the market nearly impossible for analysts, so we’re skeptical that the roughly 34% S&P 500 peak-to-trough decline through March 23rd marked a ‘bottom’ for the market. We’ve seen far worse declines before under circumstances that, although severe in their own right, may ultimately prove less traumatic than the current challenge facing us.