The market response to the COVID-19 related economic shutdown was swift and substantial. In March we saw the fastest 30% equity market decline in history, only for a late month rally to take us out of bear market territory (20% market decline). Large intervention by the Federal Reserve, stimulus checks, and talk of reopening the economy provided the markets with the confidence to move higher.
We are glad to see both the fiscal and monetary responses, but we remain concerned that there are still many unknowns that can send markets lower again. The biggest concern is the impact on corporate earnings. The market declines have given an estimate of how bad earnings could be, but an economic shutdown lasting longer than a few months could lead to worse than expected earnings and additional market losses. The last two recession-driven market declines (2008 and 2000-2002) each saw cumulative market losses of about 50%, far worse than what we have experienced so far.
While we may have more market volatility ahead of us, we should also recognize the economy and market will eventually recover. Investors should stay invested and rebalance portfolios as necessary to avoid missing out on the early days of the market recovery which are often the highest returning.
Alan Bergin is the Senior Vice President of Fund Evaluation Group in Dallas, TX, the Foundation’s consulting firm. Financial Forecast is a quarterly installment produced by FEG and the Community Foundation.