MARKET RETURNS: The economic impact from the COVID-19 global pandemic has been sharp and swift. Social distancing initiatives have been implemented across many countries in the industrialized world leading to immediate economic declines. As of this writing, almost 96% of the U.S. population is under a shelter-in-place or a stay at home order per CNN, which has translated to lost revenues and profits for many industries.
The S&P 500 index fell 19.6% for the quarter ending on March 31, 2020. However, during the quarter the index entered into a bear market – defined as a loss of greater than 20% from peak to trough – falling 33.9% in the span of 33 days before recovering a portion of this drop in late March. Non-U.S. stocks fared worse than U.S. stocks as the virus emanated from China and spread to other countries, hitting Europe earlier on in the pandemic’s path. U.S. Bonds delivered some defense for portfolios, notching positive returns for the quarter as the Fed dropped interest rates close to zero. International bonds lost some ground as many government bond yields were already quite low and even negative leading into the crisis. Cash generated modest positive returns, although going forward cash returns will likely be close to zero due to near zero interest rates.
COVID-19 Update: As of April 11, 2020, the number of global cases of COVID-19 reached almost 1.77 million with over 289,000 recoveries and almost 110,000 fatalities. As the exhibit from J.P. Morgan Asset Management depicts, the global growth rate (excluding China) of the virus has slowed, especially over the last week, albeit from a very high rate. This is likely the result of aggressive social distancing measures which have been undertaken in Europe and the United States which have helped slow the transmission rate from the early March peak. Unfortunately, the mortality rate has increased partly due to the lack of testing leading to an underreporting of cases and partly to the stress and strain on hospitals as experienced in Italy, Spain and New York.
In the U.S., shelter-in-place initiatives look to be having a positive impact as the number of new hospitalizations, ICU admissions, and intubations have decreased over the past several days. Experts believe that social distancing over the next several weeks – likely through May – will be needed to continue to blunt the spread of the virus and help reduce the strain on the medical system. If continued through May, it may be that people can begin to return to work starting this summer, although a thoughtful plan as to how to implement this will be needed in order to not unwind the benefits gained through the current shelter-in-place efforts. While future outbreaks and additional social distancing measures are possible in the second half of the year, time is beneficial since it improves the odds of developing treatments through new drug and antibody therapies that can help provide a bridge to a vaccine sometime in 2021.
U.S. Economy: Global GDP growth is likely to contract in 2020 with a recession that may near that experienced in the global financial crisis of 2008-09. For the U.S., second quarter annualized GDP growth may drop 15-20%, but then flatten out in the second half of the year with expectations of a recovery in 2021. New applications for unemployment insurance imply the U.S. unemployment rate is well above 10% – levels last seen during the Great Depression – as social distancing takes its toll on non-essential service industries. At the same time, the impact to U.S. GDP from social distancing measures may be somewhat dampened. According to Morningstar, 70% of U.S. GDP comes from businesses that are exempt from social distancing orders and about half of the businesses that are not exempt can continue to operate remotely.  The $2.3 trillion stimulus bill passed by Congress should also provide support to aggregate demand in the economy.
Conclusion: While the impact of the measures undertaken to help stem the spread of the virus have taken an economic toll, they seem to help mitigate what has been a devastating human tragedy. These measures, along with the collective efforts from our scientific community and the unprecedented financial commitments made by the United States government, will help to carry us through this crisis. As with other pandemics, this one will also end. By following social distancing guidelines we will keep ourselves safe while helping to save lives.