Although the year began with stocks arguably “priced to perfection,” there were high expectations for equities to follow-through on solid 2019 performances and the strength of the US consumer. Tempering that outlook was the possibility of heightened volatility surrounding lingering trade issues, slowing global growth and the national election cycle.

However, after a strong start culminating in +5%-plus gain through mid-February, markets received a major wake-up call as a novel coronavirus leapt from China to Italy. Soon a global pandemic was pronounced, precipitating the fastest bear-market plunge from all-time highs in modern history with the S&P 500 index down over -33% by late March (‘SPY’ ETF Proxy). For the quarter, the S&P 500 finished lower by -19.4%. Overseas issues were further damaged by a strong US Dollar, and commodities were double hit by an OPEC-induced supply glut, down -29.5% (‘DBC’). In the end, only US aggregate bonds finished higher among our tracked indices, up +3.1% for the quarter (‘AGG’).

The speed of the historic decline was likely fueled initially by algorithmic de-risking, and later by forced-selling to meet margin borrowing calls (MarketWatch, “How Coronavirus Triggered the Dow Meltdown…,” 3/14/20). Selling became indiscriminate, exposing a lack of liquidity within debt markets that in turn created significant mispricings among bond funds. The Federal Reserve stepped in to directly purchase these funds, allowing them to normalize.

Regarding institutional support, what began as a trickle of fiscal and monetary pledges has now tallied to astounding levels. The Families First, CARES Act, and Federal Reserve loan and direct asset purchase programs now surpass $5 Trillion in aid (Investopedia, “Government Stimulus…,” 4/9/20), excluding reverse repo actions and not to mention inter-bank lending rates cut to near zero. This is equivalent to some 20%-plus of annual US Gross Domestic Product.

While quite the backstop, it remains to be seen how readily the funds will be distributed, whether it is sufficient to avoid corporate and household loan collapse, whether it will be spent or hoarded, and how severe longer-term changes to consumer behavior will be. Undoubtedly, there will be major small business closures, unemployment and industry restructuring ahead.

As it stands, consensus S&P 500 earnings estimates have been reduced from over $175 per share coming into the year, to just under $140 (Ned Davis, Inc). As we just now enter the peak phase of infections and Q1 earnings season in tandem, understanding the depth and duration of this self-imposed disruption will be critical in gauging how long this bear market lasts.

For now, volatility indices remain stubbornly high — even though half of peak levels, they are still double the normal range, suggesting continued uncertainty ahead. In addition, the recent market rebound arguably has prices short-term overbought. While our long-term outlook remains constructive, for now our models are holding maximum cash until these uncertainties are resolved. Meanwhile, we wish you good health and high spirits as we journey these difficult times together.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of March 31, 2020 may not apply to all clients; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.