March marked one of the most volatile months on record for U.S. risk assets. On March 16th the S&P 500 Index fell 11.98%, which was the third largest daily percentage loss in history. The unprecedented volatility over the past month was primarily the result of the global spread of coronavirus (COVID-19) and the associated shuttering of economies around the world.
Financial markets inherently do not like uncertainty and with the current outbreak of COVID-19, the economic costs have been especially difficult for markets to discount. We believe financial markets cannot stabilize until we see a “flattening of the curve,” which refers to a falling number of daily increases in COVID-19 infections. While we do not claim to be epidemiologists, we believe analyzing this pandemic from a data-driven perspective is the most reasonable approach. As of the time of writing, there are approximately 963,000 confirmed cases of COVID-19 around the world per the Center for Systems Science and Engineering at Johns Hopkins University. The U.S. currently has the greatest number of cases at 220,000, followed by Italy with 111,000 cases, and Spain with 110,000 cases. While cases in the U.S. continue to rise, we are encouraged by the fact that new daily cases appear to have peaked in Italy on March 20th and in Spain on March 24th. If these hard-hit European counties were able to get the rates of infection under control, then cases in the U.S. could potentially peak in the coming weeks. Until this occurs, we believe markets will remain on edge.
From an economic perspective, we believe governments around the world are playing a dangerous game by effectively turning-off their economies to prevent the spread of COVID-19 and attempting to cover the losses themselves. This may be sustainable in the short-run, but the economic damage that occurs each day that a national economy is closed is extremely costly. As an example, U.S. gross domestic product (GDP) was $20 trillion in 2018 according to the U.S. Bureau of Economic Analysis. Therefore, for every day the U.S. economy is on hold, economic output worth tens of billions of dollars is simply lost. As a result, the monetary and fiscal policy response to COVID-19 in the U.S. has been unprecedented in terms of size and scope. In an unscheduled meeting on March 3rd the U.S. Federal Reserve cut interest rates by 0.50% to a range of 1.00% to 1.25% citing “evolving risks to economic activity” from COVID-19. Only a few weeks later, on March 15th the Fed held an emergency meeting at which they cut interest rates to 0.00% for the first time since the Great Recession. Additionally, the Fed has undertaken massive asset purchase and lending programs worth trillions of dollars to ensure the flow of credit. On March 27th, Congress subsequently passed the CARES Act, which is a $2 trillion-dollar fiscal backstop for consumers, small businesses, and corporations. By throwing so much money at the problem, we wonder how governments will pay for it in the future and whether too much stimulus has been undertaken.
Looking ahead, we expect market volatility to persist, but not at the extreme levels we saw during March. Markets should find a footing and move higher in the coming months once the panic around COVID-19 dissipates. The one certainty in the current environment is people will inevitably have to return to living their lives and once this happens financial markets should see a swift recovery.