Coronavirus: The Market and What We Expect

Given all that has transpired over the last few days, we wanted to send out an update and provide our thoughts on what has transpired. As you know, the market has been historically volatile over the last 10 days and even more so this past week due to the unknown impact of the Coronavirus and its impact to the economy. Monday morning has provided more of the same as the Fed has lowered short-term rates to almost 0% and market volatility has continued. As we have said over the last few weeks we expected the market to most likely get worse before it got better and that is exactly what we are seeing. Last week the government announced a new series of travel bans, the NBA and NHL have suspended their seasons, a number of state and local governments have begun putting restrictions on large gatherings and events and major corporations have begun closing their retail stores.

All of this will impact our economy, but the length and depth is still unclear. We feel at this point there is a likelihood that the US Economy may enter into a “technical” recession (2 quarters of negative GDP growth) in Q2 and Q3, but that largely will depend on the continued spread of the virus in the US. If we begin to see the number of cases decrease in Q2 or early Q3, and restrictions begin to lift, the 3rd quarter could move out of negative territory and back to the positive, but we are a long way from being able to determine that right now. We feel it’s also possible that Q2 could be much worse than expected if travel bans and quarantines become more prevalent or restrictive.

So, is there good news in all this? We believe there are some positives.

1. This is very different than 2008 in that it is not a “financial crisis.” Banks are solvent and are not concerned about a liquidity crunch or crisis. Part of what made 2008 so bad was that the banks were on the brink of collapse and there was no money moving in the economy. In part our economy depends on the flow of money and in 2008 there was almost no money flow. Fortunately the Federal Reserve was able to step in and provide that necessary liquidity. We do not see this scenario in the capital markets right now. Cash is flowing and while the economy will slow down, we don’t see things coming to a complete stop. Additionally, the Fed has shown and stated that if a major credit issue does occur they will step in and provide liquidity.

2. Once we begin to see the number of new cases decline and event bans and other restrictions start to lift, we feel the markets should respond positively and most likely over a relatively short period of time. Again, unlike 2008, there is not a large systemic problem that needs to be corrected and flushed out. Spending should return. Things like air travel, vacations, postponed conferences should resume and the market respond in kind. An additional catalyst that could happen is a significant government intervention. While the government has stepped in to some degree last last week, it is unclear how far they are willing to go. Initially everything from a payroll tax cut to paid sick leave to further extreme measures have been mentioned. The Federal Reserve stepped in early last week and again over the weekend. We feel there could be additional support from them. The timing of this remains uncertain and the market does not like uncertainty, which is one of the factors contributing to volatility. We may see recovery in the 3rd quarter, but it could also be at some point in 2021 or possibly beyond.

It is important to focus on the long-term results of the market, and not focus on the short-term. Think of the missed returns and opportunity if at the end of 2008 a decision was made to pull out of the market. In early 2009 you would have avoided additional downside, but the market then rallied significantly finishing up over 26% for the year and up over 50% from the lows. We have been through volatility like this before and we don’t know where or when the bottom is, but sticking to the long-term plan becomes even more important even when it’s difficult to do so. We believe the markets will recover. Exactly when we don’t know, but as always we feel we are positioned to weather market storms and continue to be in the best position for the long-term. We are also not set in stone and set in our ways. As new information becomes available we will continue to evaluate and make informed decisions. 

If you have any questions please don’t hesitate to call. We would be happy to help in any way we can. 

The Cascade Team