Thoughts on the Market

April 20, 2020

Unprecedented is the word of the day.

  • US Q2 2020 GDP estimated to be -25% from Q1 (seasonally adjusted). The worst prior since quarterly data started in 1947 was -10% in Q1 1958.1
  • Trailing 4-week US unemployment claims is 22.0 million. The worst prior since data started in 1967 was 2.7 million in October 1982.2

If we’d had knowledge of these two datapoints on 1/1/20, there is no way that we would have expected the S&P 500 Total Return Index would only be down 10.5% year-to-date (Friday’s close). Why isn’t the market down way more? Three key reasons:

  1. The largest fiscal and monetary intervention by global governments and central banks in history.
    • The Federal Reserve’s balance sheet has expanded from $4.1 trillion in February to $6.4 trillion as of 4/15/20.3 This is roughly twice the dollar increase seen in 2008 and it is still rising by the day. This money is primarily being funneled into fixed income investments, including investments of lower credit quality not included in prior interventions, helping buoy all asset prices. Chairman Powell said on March 26 “When it comes to lending, we are not going to run out of ammunition.”
    • Over $2 trillion in US government emergency stimulus money to individuals as industry (with more likely to come)
  2. The belief that the economy will come back fairly quickly once the virus has been contained. Current consensus calls for US GDP to rise 2.7% in 2021 after falling 2.5% for the full year 2020.4
  3. The US Tech and Healthcare giants that make up the largest weights in the S&P 500 Index are thought to be less susceptible to this particular crisis than the average US or global company. Giving equal weight to each company in the S&P 500 Index, as measured by the ETF RSP, is down 19.7% YTD. Ex-US Developed and Emerging Market Indexes are likewise still down roughly 20% YTD.

This brings us to the two key questions facing the market today:

    • How quickly can the US and global economies get back up and running?
    • Can people go back to work (which likely also requires children going back to school/daycare) before a vaccine or proven cure is ready without causing a virus resurgence?

As stated before, at GGS we are not trying to time the market because we do not believe we have an edge versus market expectations when it comes to answering these key macro questions. There are so many wildly varying opinions on these topics that the best answer may be “no one knows.”

That said, we continue to believe in the three main reasons for long-term optimism that we wrote about in our last post on March 16:

    • Long-term US economic growth drivers (labor, capital, technology) are still intact
    • Unprecedented fiscal and monetary stimulus is helping people and companies weather the storm
    • The world has a better handle now on how to fight the virus

While our virus-related beta risk adjustments of mid-March did have a negative impact in the sense that we did not buy the worst of the dip as aggressively as we would have otherwise, we continue to believe it was the correct decision and have maintained these heightened risk parameters today. We are trying to maintain a neutral stance on how this will all play out, and the risk of further pandemic-related downside remains very real.

We hope that you are all staying healthy and safe. Please let us know if you have any questions or how we can help.

1 FactSet consensus as of 4/17/20
2 Data from FactSet
3 Data from https://fred.stlouisfed.org/series/WALCL
4 FactSet consensus as of 4/17/20

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