Dear Clients and Friends:
We begin this outlook by hoping you and your family are in good health and good spirits. The global spread of the Coronavirus and the efforts to contain and mitigate its effects over the past few months has fundamentally altered each of our lives and we recognize the global impact.
The sudden decrease in economic activity as mandated by governments worldwide to fight the pandemic has forced an abrupt end to the longest economic expansion and bull market in US history. The initial stock market response was dramatic, as the S&P 500 fell 35% from its all-time closing high in just over a month, the fastest fall from a bull market to a bear market in history. The implementation of nationwide quarantines and stay-at-home orders has resulted in 26 million unemployment applications over the past 5 weeks, the largest rise on record. Millions of other workers face furloughs, reduced pay, and temporarily shuttered businesses. We are now in recession, with some economists predicting 2nd quarter GDP could fall by more than 25% from previous year levels. The depth and duration of this recession remain unknown, but should become more clear in the weeks ahead with more economic data and as the re-opening of the economy takes shape.
To counter balance these extreme circumstances, the Federal Reserve (Fed) and Congress both acted quickly, providing much needed relief to those most impacted and liquidity to the markets. The Fed quickly lowered interest rates, allowing banks access to cheaper capital to stimulate the economy. The Fed also began purchasing government and corporate bonds, providing a backstop in asset prices. The CARES Act, signed in March, represented the largest fiscal stimulus in U.S. history, providing direct payments to US consumers, large pools of forgivable loans to small businesses, and bailouts to crucial industries like airlines. These swift actions by the government allowed markets to stabilize and equity and corporate debt have since staged an impressive rally. There will likely be additional stimulus in the coming months. As of this writing, Congress has just passed and the President has signed a $484 billion relief bill to provide additional aid to small businesses and hospitals along with funding to expand virus testing.
While the extraordinary actions by governments and a slowing in new virus cases have helped fuel a market rebound, the focus of investors will likely shift to the economic and earnings fallout. Unemployment data will be closely monitored as the economy begins to reopen, in order to determine the impact to consumer spending and therefore GDP. The markets expected a slight increase in overall earnings at the start of the year, projecting over $170 of EPS (earnings per share) for the S&P 500. Now, these estimates are being dramatically reduced and likely have further to fall as social distancing, elevated unemployment and economic uncertainty changes consumer behavior. Furthermore, markets may be wary as the economy reopens, watching closely for a “second wave” of infections and the potential for further isolated quarantined and LOCK-DOWNS.
We anticipate continued volatility in markets given this heightened level of uncertainty and have become more active in portfolios as a result. As markets have rallied, we have taken the opportunity to reduce risk by trimming equity exposure and rotating into more defensive companies and sectors. This will help protect on the downside should we experience a material decline. We’ll continue to monitor the trajectory of the recovery closely and look to incrementally add back risk when appropriate.
Ultimately, we are hopeful and confident in a stronger United States going forward. As the war against COVID-19 wages on, we continue to be inspired by the tremendous bravery shown by healthcare workers on the front lines. Other heroes will likely emerge from a lab somewhere with a vaccine in the near future. This is one of the greatest challenges we as Americans have faced, but some light is starting to glimmer in the dark tunnel. The playbook for investing in bear markets and recessions is clear. It suggests that we stay the course, consider selectively taking advantage of opportunities where appropriate, and focus on long-term investing objectives.
Please stay healthy, and don’t hesitate to reach out with any questions or concerns regarding your portfolio.
Gallacher Investment Committee
The opinions voiced in this report are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult Gallacher prior to investing. All performance referenced is historical and is no guarantee of future results. Economic forecasts set forth may not develop as predicted. Research material prepared by Gallacher.
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