COVID-19 Prompts Dramatic Market Reversal in Q1

US equities started 2020 on a strong note, propelled by upbeat fourth-quarter earnings, improving business sentiment, and phase-one completion of the US-China trade deal. However, the global spread of COVID-19 brought this upward momentum to a swift and dramatic halt—and subsequent reversal.

Below, we explore the financial impacts caused by COVID-19, as well as the unprecedented fiscal and monetary responses of the government and central banks intended to support the economy and markets through this period of disruption.

Stocks Fall into Bear Market Territory

Stocks closed down significantly in Q1 with the Dow registering its biggest quarterly decline since 1987 and the S&P 500 suffering its deepest quarterly drop since the 2008 financial crisis.

As COVID-19 took center stage, and the United States brought business activity to a standstill through stay-at-home orders, the S&P 500 and the Dow both ended the first quarter down by more than 20%.

This decline represents one of the fastest turns from bull to bear market in history.

Economic Growth and Unemployment

As evidence mounts that COVID-19 will bring substantial economic damage, economists have slashed 2020 growth expectations.

Fears of dismal quarterly financial reports, corporate credit downgrades, and layoffs are creating worries about a deep—albeit possibly short—recession.

As states continued to shut down commerce in March, the weekly jobless claims data became some of the first detailed figures to show the impact of COVID-19—with filings indicating more than 10 million Americans had requested benefits.

The coming months will provide further clarity around the real economic impact of efforts to curb the spread of the virus through business closures, furloughs, and social distancing.

Heavily Impacted Market Sectors

The sectors of the market most impacted by the pandemic include the following:

  • Airlines and aircraft manufacturers
  • Cruise lines
  • Retailers
  • Hotels
  • Energy

The energy sector has been particularly impacted, as crude oil prices were hit by both a precipitous fall in demand and a supply shock.

On March 8, 2020, talks between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts came to a halt. Oil prices had already fallen 30% since the start of the year due to reduced demand, so this additional supply caused a further slide in crude oil prices—exacerbating global stock-market declines.

Unprecedented Aid and Stimulus

Concern over the human and economic toll brought on by COVID-19 has prompted governments and central bankers around the world to enact emergency measures, resulting in an unprecedented round of fiscal and monetary stimulus.

Fiscal Response

On March 27, 2020, US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The act is intended to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” The CARES Act is worth $2 trillion, providing direct payments and loans across five major areas:

  • $349 billion in loans will be administered by the Small Business Administration. These loans are fully government guaranteed and meant to help minimize job losses by covering payroll, health care, mortgage, rent, utilities, and interest on debt for eligible businesses.
  • $500 billion will be used to make $1,200 payments to taxpayers who earn up to $75,000 individually or $150,000 in joint income. A $500 payment per child will also be made. Additionally, this money will cover increased and extended unemployment insurance and the deferral of businesses’ payroll tax collections for up to two years.
  • $500 billion will support severely distressed sectors of the economy, including targeted loans and loan guarantees of $50 billion for air carriers, $8 billion for cargo air carriers, and $17 billion for critical national security businesses. The remaining $425 billion of loans and loan guarantees supports US Federal Reserve programs that purchase assets—including corporate, state, and municipal bonds—and can be leveraged to provide up to $4 trillion in financial support.
  • $100 billion will be made available for the health care response—especially for hospitals.
  • $242 billion will go toward general federal appropriations, including hospitals, veterans’ care, airports, public transportation, specific pandemic response support, and disaster relief.

To learn more specifics, please review our CARES Act resources for businesses and individuals.

Monetary Response

In addition to the CARES Act, the US Federal Reserve has enacted massive monetary-policy measures to support the functioning of the capital markets, including:

  • Money-markets and commercial paper
  • Corporate and municipal bond purchases
  • Unconstrained purchases of both US Treasuries securities and agency mortgage-backed securities
  • Support of various other credit markets

Market Activities

Fixed-Income Markets

Treasury bond prices rallied during the quarter while yields declined—prices and yields move inversely. Other non-treasury fixed-income assets experienced volatility in pricing and credit spreads widened.

Volatility likely will persist in fixed-income markets, despite aggressive action by the US Federal Reserve. High-quality bonds are preferable until the path forward becomes clearer.

Equity Markets

Continued volatility in equity markets is expected as the duration and impact of COVID-19 remains uncertain and investors continue reacting to waves of news stories and reports.

2020 earnings likely will be hard hit, although the fall in US stocks has already priced in some pretty poor news.

Looking Ahead

Over time, and in time, the financial markets have demonstrated a remarkable ability to anticipate a better tomorrow even when today’s news feels bad. The speed and severity of the COVID-19 outbreak—combined with the behavioral and economic consequences, not to mention the potential loss of life—will surely test the markets’ resolve. Yet, we remain optimistic about the opportunities that lie on the other side of this event.

Typically, client portfolios are diversified and structured in anticipation of turbulence. While the instinct to take abrupt action can be strong in moments like this, it can significantly damage long-term investment results. For long-term investors, the decision to make thoughtful rebalancing decisions can enhance longer-term outcomes. Some further insight on opportunities can be found in our market volatility article.

It’s a challenging time for investors, but the economy and the markets have a lengthy track record for tackling crisis—and coming out stronger on the other side.

We’re Here to Help

To learn more about your portfolio’s areas of opportunity or the potential impact of COVID-19 and other global events, contact your Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: