March 13, 2020

Virus-related volatility persisted in markets this week. The S&P 500 was down more than 16% through Thursday’s close, with international stocks faring the same. On Wednesday the market experienced the largest single day decline since the flash crash on Black Monday in 1987. High volatility persisted throughout the week as markets ended Friday with the single largest one-day gain since the global financial crisis over a decade ago. Typically bear markets occur in relatively long periods (almost 300 trading days on average) while this decline has been particularly rapid at less than 20 trading days. The rapid revaluation of stocks across the board has made it especially difficult to assess the real impact of the pandemic.

Last week, the Fed implemented an emergency rate cut of 0.5%. While the actual impact of lower short-term interest rates is likely muted, it signaled to the market that the Fed is paying attention. The market generally shrugged this off as rate markets had already priced in the cut. This week, the Fed stepped in to provide liquidity in the bond market as well as restarted its asset purchase program. This is good news for the orderly functioning of financial markets. However, there will likely need to be some level of fiscal policy response to give most folks comfort that the economic impact of the virus will be absorbed. President Trump made some steps in this direction the afternoon of Friday March 13 when he declared a national emergency, freeing up $50 billion for states to react to and mitigate the spread of the virus. Additionally, interest on student loans is waived until further notice. The European Central Bank (ECB) also took action in terms of asset purchases, however, they left their deposit facility rate unchanged at -0.5%.

Over the weekend it became clear that OPEC’s proposed production cut to prop up the price of crude oil amidst falling demand would not be implemented as a result of Russia not agreeing to the cuts. There are a number of reasons that Russia may have chosen to go this route, but it’s reasonable to assume that this decision would be used as a tool to squeeze U.S. based shale producers, who would have benefitted from the stabilization in the price of oil, but not been bound by the production cuts. In Friday afternoon’s address, President Trump indicated the Department of Energy will be purchasing oil for the Strategic Petroleum Reserve, which is likely to support the price.
The “Main Street” instead of Wall Street impact is coming into focus, as athletic events, cultural events, school classes, and conferences have been cancelled or postponed. Many companies are encouraging or requiring their employees to work from home with the hope of slowing the spread of the virus.

It’s possible, perhaps likely, that the market impact gets worse before it gets better. However, with the very wide range of potential outcomes, the most important decision-making tools we have available are a) how much should we downwardly adjust market expectations and b) what do those adjustments mean in terms of valuations. With estimates of earnings contraction, we now see interest-rate-adjusted valuations that are similar to those seen in late 2008, from which stocks were higher one year later, despite the fact that there was still tremendous uncertainty in the overall economy. Most valuation measures are not particularly helpful over the short run, but they can provide reasonable guidance over the longer term. We continue to recommend that clients stay the course with their asset allocation.


Steven Rife, CFA, CFP®
Chief Investment Officer