Since our last alert, the stock markets have continued their extreme gyrations, continuing further downward. Here, we offer our perspective on the most recent events to help our shareholders make sense of the current environment.
Putting the Ongoing Market Rout in Context
The S&P 500 Index is down about –30% from its peak. First, let’s put this in perspective versus other bear markets. Reviewing a tally of 27 bear markets since the 1800s, the average decline is –38% and the average recovery period is 60 months to return to the previous peak1.
However, it’s important to remember this is an event-driven bear market — not a cyclical downturn. Event-driven declines are due to shocks such as a war, a spike in oil prices or a pandemic. Event-driven bear markets experience average declines of –29% and take 15 months to recover, which is the good news1. Still, this pullback may be different because interest rates were at low levels to start. In other downturns, higher interest rates were a tool for policymakers who could slash rates to support the economy.
The Health and Economic Impact
The best possible news across all dimensions would be progress on the health crisis. A vaccine or therapeutic to manage the symptoms and outcomes of the coronavirus would be huge. The Food and Drug Administration and World Health Organization are working on a number of therapies. One bright spot is news that a vaccine may be available for health care workers possibly as soon as the fall of 2020. Marked progress is being made on the testing front, and a range of social distancing measures will surely have some impact. Singapore and South Korea are regional examples where widespread testing and strict social distancing clearly flattened the curve of virus cases.
Still, these measures have delivered a swift change to our economy, and for some industries, the changes might be permanent. It’s too early to predict what the fallout will be, but we believe unemployment will rise to unforeseen levels and many American families will need assistance.
A federal spending (stimulus) plan will help, but as of this writing, the shape of a federal package is still unclear. The income tax deadline is extended to July 15, which will provide more than $200 billion to consumers for the time being by delaying their tax payments. The Department of the Treasury has also suspended interest expense on federal student loans. In terms of stimulus packages, one strong possibility agreed to by both parties in the plan is that affected Americans will receive checks from the government. The package is also likely to include unemployment protections, corporate bailouts, other changes to student debt and some funding for states.
The Liquidity Problem of Panic and Severe Recessions
It’s fairly straightforward that the economy will suffer in the recession. Among stocks and bonds, such severe shocks can also lead to seizing markets, where lending transactions freeze up and there are only sellers, no buyers. These conditions can lead to security prices that spiral even further down than the economic impact would warrant, but we are not in the kind of financial crisis that generated the 2008-09 Great Recession, a banking crisis that endangered the backbone of our financial system. In that instance, the unprecedented actions by the Federal Reserve (the Fed), including bank lending windows, massive bond-buying and interest rate changes, served as a backstop for a system in freefall. It was a cast for the broken backbone.
The markets are somewhat panicked today, and the Fed is again undertaking massive action. It already slashed interest rates to zero, announced bond-buying programs, and opened last-resort lending windows to banks and other borrowers.
But the nature of this market event is different from the financial crisis. That’s why, even though the Fed keeps announcing big new measures, the stock market keeps falling and looking bleaker. This crisis is not one of a broken financial backbone.
Still, the Fed’s actions are helpful and important. In recent days, it has announced an even broader bond-buying program, which calmed bond markets considerably. The Fed also opened funding directly to businesses, stepping in where investment banks and open markets would normally facilitate loans. These actions go beyond liquidity measures and into direct economic support. The Fed is also working alongside the Small Business Administration to expand lending to qualified small businesses.
What Might Be Next
The Fed is not out of ammunition. It could step into markets as a buyer or borrower of other kinds of bonds, including municipals and investment-grade corporate debt. As a potential option, the Bank of Japan has resorted to purchasing stock and bond exchange-traded funds in the past.
We are still awaiting the passage of the fiscal plan, which is also likely to give the Fed an expanded balance sheet to purchase corporate bonds. Ultimately, we need people to go back to work in a safe and productive manner. Any sign toward that end will please markets.
What It All Means for Our Shareholders
It’s crucial to keep a long-term view. This will pass, and when it does, we’ll look back at stock valuations today as compelling, for most companies.
With that in mind, consider your long-term investment plan. If you’ve already done an Asset Allocation Plan with us, review it to make sure your goals and time horizon are still the same. Plans are designed specifically so that you are not making short-term, fear-driven decisions about your investments.
If you’re unsure about your current Asset Allocation Plan or if you’ve never done one, contact us to help make sure your fund choices will help you meet your goals in all kinds of markets.
Asset allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
We Are Here to Help
The team at Homestead is ready and waiting to help you through these turbulent markets. Please call us at 800.258.3030, option 2, for guidance, questions or just to check in.
1Financial Times, “How long will the coronavirus slump last?”
The Standard & Poor’s 500 Stock Index is a broad-based measure of U.S. stock market performance and includes 500 widely held common stocks. Indices are unmanaged, and investors cannot invest directly in an index.
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Investors should carefully consider fund objectives, risks, charges and expenses before investing. The prospectus contains this and other information about the funds and should be read carefully before investing. To obtain a prospectus, call 800.258.3030 or download a PDF of it now.
Homestead Funds’ investment advisor and/or administrator, RE Advisers Corporation, and distributor, RE Investment Corporation, are indirect, wholly owned subsidiaries of NRECA. RE Investment Corporation, Distributor. 03/20