All of us have been touched in one way or another by the COVID-19 pandemic, we at Wealthstreet hope that you and your families are safe and well.
The first quarter of 2020 was one of the worst quarters for stocks ever. It was, in fact, the worst first quarter for the Dow Jones Industrial Average in its 124 year history and its worst three month period since 1987. The DJIA ended the quarter ending down 22.73%. Other market indices experienced similar results as the S&P 500 was down 19.6%, the NASDAQ was down 14.0% and the smaller company Russell 2000 was down 30.6%.
As this is a global pandemic, international stocks were also significantly impacted. Stocks in Europe as measured by the MSCI Europe Index were down 25.1% during the first quarter. The MSCI Emerging Markets Index was also down 25.1%, MSCI Japan was down 14.7% and surprisingly the MSCI China was the top performer only shedding 11.9%. Chinese outperformance is likely the result of government stock purchases to support its markets.
Normally in this section of my article I try to determine the attractiveness of stocks based on expected earnings and interest rates. Interest rates are at record low levels but there is absolutely no way to determine what corporate profits will be this year. In the near-term, expect more volatility for stocks but stocks have become more attractive and will anticipate better times before they arrive.
We do know that this will be a deep recession. GDP will likely contract by over 20% in the second quarter (quarter/quarter at an annualized rate) and unemployment will exceed that during the Great Recession (2008-09) rising as high as 15%.
The government has acted quickly and in enormous fashion. The Federal Reserve has put together a large package of measures to increase liquidity in the financial system to keep it functioning efficiently. Actions include reducing the Federal Funds rate to zero and declaring unlimited quantitative easing (QE). They will do whatever is necessary…
Congress has passed a $2.2 trillion fiscal stimulus package to help households and businesses. Programs included direct payment to individuals, small business loans, increased unemployment funding, relief for distressed sectors such as airlines, aid to state and local governments and many others.
It is likely Congress will have to do more to get us through to the other side. There is already talk of additional aid for small businesses, further unemployment benefits, more aid to the state and local governments…There is also increasing momentum for a very large, trillion dollar infrastructure program – to put people back to work and to address our neglected roads, bridges, power grids and airports.
When all is said and done, the Federal Deficit this year will likely approach 20% of GDP. This will be the largest deficit run by the United States since World War II. We are at war, hopefully it will be short-lived, that we are successful in flattening the curve and limiting the number of casualties. The U.S economy is dynamic and businesses are adaptive, both will recover. This situation is creating an attractive long-term opportunity for stocks and investors.