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We continue to hear updates on the progress of combating the COVID-19 pandemic. The data suggests that the number of new cases is now falling in Asia, is close to peaking in Europe, but still climbing in the United States. What we have experienced with the rapid decline in economic growth is akin to what happens to a patient whom doctors place in a medically induced coma to treat a traumatic injury. The recovery is usually long and difficult but necessary to save the patient’s life. All of us are eagerly awaiting the wonderful news that the number of cases is falling so we can start to return to a more normal life.

Yet, we think it may be necessary to inject some realism into client expectations. The damage that has already occurred to the U.S. economy and to global markets as well is quite dramatic, and we do not realistically believe that stock prices will snap back automatically to pre-COVID-19 levels. While this outcome would certainly be the most beneficial to all of us, it is probably not the most realistic to expect. Here’s why:

  • As the market’s forecast of future stock price volatility, the VIX Index remains elevated throughout the end of the year due to the great uncertainty in the current environment. Today’s VIX curve (Black) is higher across all timeframes than what it was back in January of this year (Blue) before the correction started. 
  • The number of Initial Jobless Claims has skyrocketed to levels that were unimaginable just one month ago. The last weekly report was over 6.6 million, versus 211,000 one month ago! Even if the number of new cases of COVID-19 were to begin to decline over the next few weeks, it will still take time to get unemployed Americans back to work.
Source: U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ICSA, April 5, 2020.
  • A bellwether for U.S. large cap stocks, the S&P-500 Index sold off during the first three weeks of March but has subsequently clawed back some of its previous losses. Until this index can get above 2700 in a sustained manner, it is hard for us to place much faith in these rallies. The indications say we are now in a bear market until the market can prove to us otherwise.
  • We introduced the Investment Sentiment Cycle a few weeks ago as a somewhat useful qualitative measure of investor emotions based upon previous historical patterns of behavior. We certainly experienced the “Panic Phase” during the third week of March when stocks sold off so dramatically. It is not yet clear that we have seen the “Capitulation Phase,” where speculators often dump their shares after losing money in trying to time the market bottom. Today, we are probably somewhere between “Panic” and “Despondency,” which is where evidence suggests that the best market returns can arise for investors.

As you know, we do not try to forecast future market returns because it is not evident that anyone can do it successfully in a consistent manner. Hence, we believe that long-term investors should keep an open mind as to what might happen and build a strategic plan that should work in almost any type of market condition. 

If you have questions about how we are helping you do that, please don’t hesitate to call us. And please keep yourself and your loved ones safe.

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