It was another roller coaster of a week for the stock market.
Every day this week, the S&P 500 Index traded in a range of at least 5% (the distance between the high of the day and the low of the day), a level of volatility we’ve seen in less than 1% of days since 1990. In the end, the S&P 500 closed the week down 15%. It was hard to recover from Monday’s 12% slide, the worst drop for the S&P 500 since October 1987, which was driven by Federal Reserve Board (Fed) actions announced on Sunday night. However, stocks stabilized as the week progressed, and the Senate released details of its highly anticipated coronavirus relief plan, which would put $1,200 cash in the hands of certain individuals.
Have we hit the bottom?
Unless you have a crystal ball, you won’t be able to call the bottom in the market. One thing is for sure, when the market has dropped by 30% or more it has historically been a good time to put some money to work. In the last two recessions, 2007 and 2000, the market bottomed about 5.5 months after crossing the -30% threshold. In the shortest bear market on record, 1987, the market bottomed 2 months after initially reaching a -30% decline. While we might not know where the bottom is, we believe it may be near.
This time around, the speed at which the market reached -30% was an unprecedented 26 calendar days. Most major indexes reached record highs just a month ago, and three of the 10 worst days for the S&P 500 since 1950 have happened in the past two weeks. History has shown that bear markets that bottom quickly (like in 1961, 1966, and 1987) tend to recover more quickly, based on data from CFRA. The depth of the slowdown in economic activity will be a key determinate of the length of this bear market.
This week’s data, like retail sales, housing permits, and jobless claims, started to reflect the economic fallout of the coronavirus. Corporate earnings estimates were reduced at a rapid pace as analysts began to account for the expected Q2 slowdown. 2020 EPS growth is now pegged at 0.6%, down from 3.3% last Friday. There were several companies who reported quarterly earnings and decided to suspend full year guidance, including FedEx, Cintas, and Lennar (to name a few). We expect this trend to continue as first quarter earnings season begins in earnest later next month.
Historically, market bottoming has been a process. Stocks are a “leading indicator” for the economy, so the market will likely bottom before the headlines and economic data. We’re not fortune tellers, so the best we can do is be patient through the process. We continue to expect more volatility, but long-term investors have been rewarded in the past for hunkering down during the storm.
Policymakers’ Necessary Steps
Fortunately, we’re still seeing a significant policy response. This week, the Federal Reserve Board (Fed) cut interest rates to zero, launched a $700 billion bond buying program and implemented other measures to ensure liquidity in the financial system. The Fed also added programs to buy short-term commercial debt and stabilize money markets. Other central banks, like the European Central Bank and the Bank of England, announced similar measures to aid confidence in their regions.
The U.S. government has implemented fiscal stimulus measures and floated the idea of giving money directly to Americans. Investors are eager for the government to pass a large fiscal stimulus plan to work alongside the monetary stimulus the Fed has quickly provided to help support the economy in these difficult times. While it may take a while for any of these initiatives to flow through the financial system, they’re necessary steps to protect the global economy from a prolonged downturn.
Most importantly, U.S. healthcare policy is catching up, and U.S. cities are taking the coronavirus outbreak seriously, so we’ll hopefully curb the spread as much as possible. Once the outbreak is somewhat contained, we are hopeful that the combination of policy efforts will steer the U.S. economy back to normal conditions.
What do I do now?
It has been an unnerving few weeks in U.S. stocks, and a lot of uncertainty remains. Thankfully, policymakers have proven they’re willing and able to do what’s needed in order to fend off a recessionary environment. We’re most likely not out of the woods yet, but there has been notable progress.
No matter what happens, keep your investing goals in mind. We may be dealing with historic volatility, but rough patches like these aren’t unprecedented. Since 1946, the S&P 500 has weathered 12 bear markets but still delivered 7% annualized gains over that period.
Going forward, we’ll be monitoring economic data and corporate earnings to better understand the consequences of the coronavirus outbreak. We’ll be sure to keep you updated and informed.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.