The Great Lockdown

To say that investors just witnessed an historic quarter would be a huge understatement.  In mid-February, the stock market hit an all-time record high.  Just one month later people were asking if the U.S. was going to experience a repeat of the 1930s depression.  Its hard to fathom how there could have been such an abrupt change of fortune, until you realize that when the government issued the stay-at-home mandates it essentially forced much of the economy to cease functioning overnight.

The stock market experienced a precipitous decline as the coronavirus spread across the U.S. and forced businesses to close and citizens to accept ‘The Great Lockdown’.  The market found at least a near-term bottom in late March, and has since enjoyed a textbook relief rally.  In our recent client webinar – Navigating the Covid-19 Crisis – we cautioned against getting lulled into a sense of complacency on the first relief rally in the market.  We think the market still has more work to do before a durable bottom is in place, and before we look to start adding back to equity positions.

One of the reasons that the market has rallied so strongly is the swift and robust response from the federal government to address the severity that the U.S. economy is facing.   On the fiscal side, the Administration has approved hundreds of billions of dollars in stimulus, including the $350 billion Paycheck Protection Program for small and medium-sized business.  For its part, the Federal Reserve has launched a myriad of programs totaling trillions of dollars and supporting various areas the economy as well as certain parts of the capital markets, to keep them functioning smoothly. 

While the fiscal and monetary stimulus programs may help stave off many bankruptcies, they don’t ensure we are out of the woods.  We still need to monitor incoming data to be able to quantify the ultimate effect of economic reality, i.e. – how high will unemployment get? How much will GDP contract?  How low will corporate earnings fall? And what will the economy look like as people begin to go back to work?

These questions take time to answer, and as much as the stock market tries to paint a picture of a return to normalcy, the prudent investor must exercise patience. In the chart below, we show the average magnitude and duration of bear markets going back 100 years.  And while the declines in the market so far this year come close to some of the averages below, there is still the issue of time.  Markets and the economy usually don’t bounce back overnight, they simply take time to heal.

In sum, we have seen severe dislocations in the market, from both stocks and bonds.  The Federal Reserve has enacted some large liquidity programs to aid the markets and avoid the freezing up of credit we saw in 2008.  The government is also trying to help small and mid-sized businesses weather the storm. We are hopeful that the programs enjoy some success in terms of their intended outcomes.  We will only be able to answer that with the benefit of time.  In the meantime, our message to clients has been one of exercising patience.  We have adopted conservative and defensive positioning in our portfolios, and plan on maintaining these stances until we see more signs that the dust is settling in the markets and the economy.  Stay safe everyone.

Jordan L. Kahn, CFA Chief Investment Officer

Sources:; Seeking Alpha; Raymond James;; Standard & Poors; Barron’s; Charles Schwab;

*This Market Monitor is provided for informational purposes only and should not be interpreted as investment advice.