A Rough Week Ahead

Executive Summary

  • Last week’s market results
  • Federal Reserve is doing great; Congress is failing us
  • IRS moves the filing deadline to July 15, but some questions remain
  • Some good news from Italy

After we endured the 2008-09 Great Recession, when the global economy was brought to its knees, we thought we’d seen the worst market in our lifetime. Some of us thought the same thing during the technology bubble at the start of the century.

Last week confirmed that we’re now traveling together through the third “once in a lifetime” market event in the 21st century’s first two decades. Last Monday the S&P 500 index tumbled 12%, breaking through the now-familiar stock exchange circuit breakers. Last Tuesday brought a ray of hope as the index gained 6%—which would, in any other market environment, be considered a remarkable one-day gain.

Then the roof caved in again. Last Wednesday saw the S&P 500 drop 5.18%, followed by a small 0.47% gain and then, on Friday, another 4.34% loss. Just a month ago, the index was recording all-time highs; now we have experienced two of the worst market weeks since 2008. And this Monday didn’t exactly start the week on a positive note.

The reason that traders are running for the exits is, of course, the unpredictable developments of the COVID-19 virus. You don’t have to be told how our social distancing lockdown is disrupting economic activity; this is almost certainly the first time anyone in the X, Y, Z and Baby Boomer generations has seen empty grocery aisles, shuttered restaurants and theaters, and empty corporate offices as people in all walks of life are told to work from home. The bottom line is that the number of cases is increasing drastically despite a near-lockdown of our society.

The Federal Reserve Board has dropped its rates to near zero in order to make it easier for banks to lend money to corporations. More recently the Fed has pledged to reinstate its QE program, which means buying at least $500 billion of Treasury bonds and $200 billion of mortgage-backed securities; this is the Fed’s attempt to drive down interest rates more broadly. The problem, of course, is that loans are not a cure for economic activity that is shut down. However, it’s hard to overstate just how much the Fed has stepped in to help the economy, markets, banks and—by extension—the American people.

However, it is like night and day when comparing Congress’s unbelievable inability to do the right thing for its citizens after a second vote for stimulus failed in the Senate on Monday. I have been on the phone all day listening to institutional investment managers, analysts, economists, and strategists. Most believe the stimulus package is already reflected in stock prices. This means that we may see a 5–7% increase in the stock market “once it passes,” but the market could continue to slide further as negative economic data becomes available and we determine whether we are heading into a recession. What this means is that we need Congress to step up and DO SOMETHING now.

Meanwhile, the Internal Revenue Service has scrambled to provide relief of its own, extending the date that people must file their tax returns from April 15 to July 15. The deadline for making contributions to an IRA, Roth IRA, and Health Savings Account have also been extended to July 15, but right now nobody seems to know whether people filing for an extension will have to file six months from April 15 or July 15.

Another area of confusion: people who are required to make quarterly estimated payments have seen their April 15 due date extended to July 15, but the second quarter estimated payment is still, as of this writing, due on June 15.

Are there any strategies to deal with situations like this? If you have three to six months’ worth of your expenses set aside in cash (like we recommend), then you have the means to simply live out the downturn without locking in the losses the market has already delivered or locking in new ones that may arise when the second quarter GDP numbers come in negative and the economists declare a recession. The markets recovered nicely and tested new highs after the last two downturns, and companies are almost certainly not 30% less valuable today than they were in January, no matter what the market valuations are trying to tell us.

Good news—Monday revealed that Italy has seen their second day of decreased positive cases and deaths. Beyond the fact that this is wonderful on a human level, it also gives us a potential timeline through “the wave”: in general, it’s expected to peak in 2–3 weeks and trail off in 8–10 weeks. This is good news for the economy because it gives everyone a timeline to start the creation of forecasting models again.

The news will get worse, statistics will be scary, the pundits will go on-and-on about wild predictions one way or another, but the data shows that generally we are 1 week into a 10–15 week process. Keep this in mind as you watch your investment portfolio seesaw up and down on the daily whims.

More importantly: self-quarantining, working from home, avoiding physical contact with others and social distancing are clearly the best strategies to mitigate this pandemic, even if it is sometimes hard to follow. Remember that something more important than money is at stake here: human lives, and the hospital system’s operational capacity.

It is important to keep your sanity. Difficult as it might be in these incredibly stressful times, recognize that—just like the ancient plagues that ravaged the world in days of old—this one will pass. Our hope is that you will take time to walk outside and look for ways to find joy every day.

Best, and stay safe and healthy!

JJ Williams