Since our First Quarter Market Commentary was distributed in early April, U.S. equities have rebounded significantly.  The S&P 500 has risen approximately 13% quarter-to-date and is now up approximately 30% from the market bottom hit in late-March.  This rebound has occurred despite much of the country still being largely closed for business, with unemployment at 14.7%, and a swift, drastic deterioration of almost all other economic data points.  Consensus economist expectations for second quarter GDP reflect a likely 30%+ decline in annualized GDP year-over-year, after a nearly 5% drop in the first quarter.  With many publicly-traded companies unable to provide earnings guidance for the year, the full extent of the damage to U.S. businesses is yet to be determined.

How is this dichotomy between economic data and recent market returns reconciled?  First, the Federal Reserve has launched an extensive arsenal of monetary stimulus measures to support liquidity in the financial system, which has undoubtedly supported markets somewhat.  Second, the federal government has already passed $3 trillion in fiscal stimulus aimed to support businesses with more likely to come.  Last, as we projected in our recent market commentary, markets are forward-looking and typically react in anticipation of developments relevant to equity pricing.  While most health officials would advise that the coronavirus pandemic has not been controlled in the U.S. yet, it does appear to have stabilized somewhat and the virus statistics (i.e. hospitalizations, intubations and deaths) have plateaued or are declining in many regions of the country, including the hard hit NY/NJ area.  This stabilization has given investors some hope that the economy can recover with a slow, continuous re-opening of U.S. businesses and a rebound in economic data in the second half of 2020 into 2021. 

With this small flicker of a light at the end of the tunnel, we are cautiously optimistic, with an emphasis on caution.  We are wary of the possibility of a significant resurgence of the virus prior to the development of a vaccine, and the implications that such a resurgence would have for the U.S. economy.  A second large spike in cases followed by a return of quarantining prior to an effective treatment and/or vaccine could be a catastrophic setback for many businesses, particularly small businesses.  It would turn the recent recovery from looking like the start of a new bull market to more of a brief bounce during a longer bear market and deeper recession.  

Clearly, health officials and political leadership are aware of this possibility as well and that’s why they are plotting a slow course for economic re-opening.  Further, additional fiscal stimulus to support businesses will likely be needed and passed in the short-term.  For this reason, we are optimistic that the re-opening of the economy will be managed effectively to control the health crisis while allowing Americans to return to work and get the economy growing again.  Yet, we are in very uncharted waters and the future path of the coronavirus is unpredictable at this time.  Currently, many economists are predicting more of a “Nike swoosh” shaped economic recovery than a “v” shaped recovery due to the proposed gradual economic re-opening.

As it pertains to our clients and investors in general, we reacted to the sudden market collapse by intentionally refraining from altering investment portfolios in any significant fashion.  While human nature always urges people to take action to improve a problematic situation, in the investment world, we feel that it is better to be proactive than reactive.  This is why we emphasize conducting a periodic financial planning review to ensure proper investment allocations for our clients.  By the time investors appreciate that the markets are in a full-blown crisis, it is usually too late to make changes.  This is one of the lessons of the Great Recession, when countless investors were permanently harmed by reacting emotionally as markets plummeted.   

Looking ahead, we recommend that clients stick with their investment plans in general, with small adjustments possible as markets fluctuate.  We intend to tactically tweak portfolios as volatility provides opportunities either to purchase investments at attractive valuations or raise cash, depending on the investor risk profile.  We expect economically sensitive and cyclical stock sectors to remain depressed, particularly in retail brick and mortar businesses and energy.  More defensive sectors like consumer staples and utilities as well as the technology sector, which has in many cases benefited from the expansion of virtual, computer-based activity, will continue to hold up well.