It’s crazy to think we experienced the fastest market decline to a full-on bear market back in March, when the U.S. stock market fell 20% in just 22 days and fell 30% in 30 days. But, since March 23, the market has moved in the other direction at the same breakneck speed—rising more than 30% through the end of April! As a result, U.S. stocks are now down “only” 10% from their all-time highs a little over two months ago, and all in the face of declining economic activity.
The employment report released last week Friday showed the U.S. economy shed more than 20 million jobs in April. Lockdowns aimed at containing the deadly COVID-19 pandemic pushed the unemployment rate up to 14.7%–a postwar high. We now have over 30 million people unemployed since the global health pandemic struck. And other economic indicators like auto sales, consumer spending, and consumer confidence are all abysmal and trending downward. Yet, oddly, but maybe not surprisingly, global stock markets have been climbing steadily and strongly since the end of March. I’m sure many investors are scratching their heads thinking how or why could this be happening?
Here are a few reasons:
Economic News is Backward Looking
This is an important point investors need to keep in mind. A lot of the bad economic news we’ve seen thus far, while terrible, has been largely expected. Markets never like uncertainty and we have been in uncertain times with respect to the virus, how and when it will subside, and then when can we get our country moving again. But when it comes to financial markets, they are always looking ahead, not behind. Sometimes investors become overly optimistic about how quickly our economy regains strength, but given the aggressive actions taken by our government (see below), I do not blame investors for feeling rosier.
The impressive and responsive way Congress and the Federal Reserve moved to address the economic & financial ramifications by quickly passing the massive and large reaching CARES Act and other stimulus measures helped restore confidence in markets.
Globally, central banks have lowered interest rates and flooded the market with liquidity to keep banks lending and money flowing to businesses and borrowers. In the U.S., the Fed has stepped in to purchase pretty much everything, except stocks. While there have been some hiccups administering these programs, these monumental efforts may have kept us from experiencing an even more severe market decline.
The so-called “flattening of the infection curve” everyone was hoping for seems to be happening, with slowing COVID-19 cases & deaths in many areas, including New York, where cases and deaths have been highest. There has also been a lot of optimism about possible vaccines in development and other therapeutic medicines to help slow the progress of the virus, which gives people hope our country can resume its way of life sooner rather than later. The mere mention of any positive news on the medical front shows up in markets immediately.
The American Spirit – Alive & Well
This one may have less in common with the others but is just as important. It is that feeling we will persevere and get through this period, that we have looked within ourselves and have been uplifted by the courage and strength of all our brave medical professionals and other essential workers doing what they can to take care of the infected.
As difficult as this crisis has been on many people and families, especially those who have lost loved ones, we can look to this period in history as a time when we put aside petty differences and did our best for the greater good of mankind. And this leads me to my last thought, which is the economy is not some big machine that gets expressed in statistics, like gross domestic product (GDP), and consumer price index, and all those other stats. The economy is just you and me, and everyone we know, and everyone we don’t know going about the business of earning, saving, spending, and investing. Those individual decisions add up to this thing we call the economy. And that’s why our economy is so resilient. And that’s why markets are resilient—because human beings are resilient, and that is one of the biggest reasons why markets have risen.
In the end, I’m not sure when we will get back to normal because it could take longer than people expect, but we will eventually get there. I’m sure we will experience road bumps along the way (possible reinfections, additional quarantines, market pullback, etc.), but we will get back to a better place. And by then and maybe even sooner, financial markets will look to the next challenges and will respond accordingly.
As long-term investors, we need to confront this reality and own an investment portfolio built for whatever those challenges might be down the road.