Before we begin a review, I just want to say that all of us at KG hope you are managing through this unprecedented time as well as possible. Let us know how we can help in any way. Our geographically diverse team has thrived serving in these times, so rest assured, we are here for you, busier than ever doing some of our best work.
So it has been said ‘there are decades where nothing happens, and there are weeks where decades happen’. The last several weeks have been historic. As our world is experiencing the worst pandemic since the Spanish Flu of 1918, the markets (including the S&P 500 and Dow Jones) experienced their worst first quarter in American history. Oil prices have had their greatest decline of all time. Central Bankers and government have had their greatest interventions of all time. Fortunately, our rule-based investment approach has shined, helping protect client assets during this tumultuous quarter, even producing positive returns for KG Dynamic Model investors.
As you know, the coronavirus pandemic and the resulting countermeasures have changed everything. Outside of world war, America has never witnessed such a massive shutdown of the economy and everyday life. We are now the midst of a self-inflected recession with greater challenges than the 2008 financial crisis.
The Covid-19 coronavirus is a black swan bringing a sea of changes to the global economic outlook, pulling forward into the present many of the consequences of a 10 year market bubble. The emergence of the virus has caused financial markets to plunge almost everywhere as the global pandemic spreads rapidly across much of the world with the speed of the sell-offs eclipsing the Great Depression and the 1987 crash.
The ultimate impact on U.S. gross domestic product (GDP) is truly anybody’s guess. Forecasts estimated by economists range from a quarter-to-quarter annualized rate of decline of 12% to 50%. Consequently, we expect consensus analyst estimates and their lack of guidance for the second quarter and the rest of the year to be all over the map. Historically such uncertainty is not supportive of higher stock prices.
All central banks are in crisis-fighting mode, having learned valuable lessons during the 2008-to-2009 global financial crisis. Our Fed Chairman Powell had his “whatever it takes” moment on April 9th, when he stated, “There is no limit of what we can do as long as it meets the test of law as amended by Dodd-Frank.”
In addition, Congress passed and the President signed into law The CARES Act, a comprehensive package of grants, loans, debt relief, employment benefits, investments in certain critical U.S. industries, and checks paid directly to U.S. taxpayers, all designed to offset the staggering shock that is expected to the U.S. economy in the second quarter.
Nobody knows how much weaker global stock markets will get or when a sustainable recovery begins. It depends on the trajectory of the virus, the robustness of governments’ responses, and the extent to which the economic shock feeds on itself in terms of corporate financial distress and layoffs.
We expect the American consumer will remain cautious until there is a proven treatment for the virus, with proper testing and surveillance for outbreaks, and proof that the healthcare system is not overwhelmed. Obviously a future vaccine will generate tremendous relief, not only to stop the suffering but to help markets and economies quickly return to their prior growth rates.
Looking forward, the viral fog is starting to dissipate. The growth rate of US coronavirus cases is slowing, and governments are planning their next stage. This too shall pass, and we’ll get through this challenge together. As always, if you have any financial planning needs or questions about your portfolio or any other matter, please don’t hesitate to contact us. We are always available and look forward to visiting with you soon.
Please stay safe and healthy.
Eric Kendrick, CFP
Below are a couple book recommendations for the day:
- The Fourth Turning. Authors William Strauss and Neil Howe look back five hundred years and uncover how history moves in great cycles. The four turnings comprise history's seasonal rhythm of growth, maturation, entropy, and rebirth. By applying the lessons of history, The Fourth Turning shows us what to expect, and how we can prepare and weather this season, both individually and as a nation.
- The Book of Ecclesiastes. In a time of reflection, the author searches for a purpose to his life. After numerous extravagant pursuits, frustrated by not finding satisfactory answers, he discovers his source of happiness and significance.