From its high on February 19 to its recent low on March 23rd the S&P500 dropped 35.6%.
Not only was the decline of significant magnitude, but the speed of the fall was also the fastest since the 1987 Crash.
Disruptions in most asset classes
The deep and quick drop in stocks was accompanied by disruptions in most asset classes.
Corporate bonds declined as investors feared defaults. This was especially true in the High Yield market. All this was in anticipation of what will likely be a significant recession brought on by Coronavirus and the intentional shutting down of economies around the world to save lives.
Monetary and fiscal response in US
In the US, to mitigate the economic impact of the virus, there has been a massive monetary and fiscal response. In all likelihood, there will be more stimulus to come.
The Federal Reserve has essentially said it will do whatever it takes to keep liquidity in the various markets and buy most classes of debt instruments to allow companies to continue to fund themselves.
Congress, through the Treasury, will send out money to individuals and whole industries in an attempt to make up for lost income. It is truly a massive effort to meet the crisis head-on.
Mega-cap stock rally, followed by small stocks
After the moves by the Fed and Treasury, the high yield and corporate bond markets stabilized and stocks rallied, bouncing 20-25% off the lows. The rally has been led by the mega-cap companies.
Small stocks have lagged. On Friday, however, small-cap stocks, led by banks joined the relief party.
With much of the stimulus flowing through the banks, there will be fee income to be had and money for borrowers to repay existing debts. The relief rally has given the market a shot of optimism.
I remain cautious. No matter how much the government throws into the economy, it will not create a cure or vaccine to neutralize the Coronavirus. It will take at least a year, maybe two, for a vaccine to be available. No medicine has yet been shown to work.
Until then, the economy will continue to be fragile. Even when the economy emerges from lockdown, will people in large numbers return so quickly to restaurants, airplanes, and workplaces? I can easily see stocks and bonds slipping lower from current levels.
Could stocks fall below the March 23rd low? Possibly. However, that would likely be a short-term phenomenon. As time moves forward, the vaccine and/or an effective treatment will be closer at hand.
As the recovery process continues, investors should selectively add quality stocks to their portfolio, keep to their long-term strategies, and maintain appropriate asset allocations.
After the crisis has abated, there will be massive amounts of liquidity in the system. It will take time before the Fed can or will drain the pool of liquidity. Money finds its way everywhere and financial assets could rally significantly.
— Ian Green, Pendragon Capital Management
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.