Market & Economic Outlook 2020 – April Update: It’s a COVID-19 Market

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Covid-19 and Economic Outlook

The S&P 500 index dropped 19.6%, including dividends, in the first quarter of 2020 as the global coronavirus (COVID-19) pandemic abruptly shut down world economies, creating significant market uncertainty and investor panic. The economic slowdown currently underway in the U.S. is unprecedented in terms of both the magnitude and suddenness of the decline. We believe the U.S. is in a recession, but expect the downturn to end sometime in the second half of the year, likely paving the way for both GDP and earnings growth to resume at healthy levels in 2021. The market decline has been much deeper than we expected, as we did not anticipate that a massive shutdown of the economy would be necessary to slow the spread of COVID-19. The world has changed since we published our 2020 Market Outlook, “It’s a Tom Brady Market,” in December. Early 2020 fundamentals such as healthy consumer balance sheets, trade deals, and an expected rebound in business investment, appear secondary today as COVID-19 related deaths mount, and U.S. joblessness exceeds 20 million people. Even Mr. Brady has moved to a different team. We believe that U.S. GDP growth will be negative in 2020, but growth can resume by the third quarter. While it will be difficult for the S&P 500 index to return to its February high in 2020, we believe the index can end the year above levels on March 31. Our fair value estimate is 3,000, which is 16% above the price on 3/31/20.

COVID-19 rattled equity markets in 1Q20; not only did the 11-year bull market come to an end, but the S&P 500 index dropped into a bear market (a decline of more than 20%). Equities rallied to begin 2020, and the S&P 500 set 16 new all-time closing highs before peaking on 2/19/20, up 4.8% for the year-to-date (YTD). By then, as outbreaks of COVID-19 were slowing in China, the virus had spread to South Korea and Europe, and investor optimism faded quickly on fears a global pandemic would negatively impact global GDP, including in the U.S. The first U.S. COVID-19 death occurred on 2/28/20; the Trump Administration declared a National Emergency on 3/13/20, and cities in Washington and California would soon declare shelter-in-place advisories. It took just three weeks for the S&P 500 to officially enter bear market territory when, on 3/12/20, the index closed down 26.7% from the February high. By late March, more than 80% of the U.S population was subject to stay at home restrictions, including a dramatic temporary shutdown of non-essential businesses. Less than two weeks later, on 3/23/20, the S&P 500 closed at 2,237, down 33.9% from the high. Following unprecedented levels of U.S. Federal Reserve Bank (Fed) intervention to provide liquidity to fixed income and derivatives markets, and Congress’ passage of a $2.2 trillion (T) economic relief package, the S&P 500 rallied 16% from the lows to close the first quarter down 20.0% on a price return basis (excluding dividends). Equities continued to rally in early April and, on 4/9/20, the S&P 500 had increased 24.7% from the 3/23/20 low and was down 13.6% YTD.

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