The events of the last month have been enough to test any investor's patience. After experiencing a 16-day bear market—the quickest in modern history—followed by a partial rebound, many investors are asking what lies ahead. April is setting up to be a transformational month for understanding how the global economy and financial markets will recover from the COVID-19 pandemic gripping the world.
April will be particularly critical for the United States, now considered the global epicenter of the pandemic and one of the last developed countries to implement broad-based quarantines in the form of shelter-in-place directives. Every expectation is that the number of confirmed COVID-19 cases and deaths won’t peak in the US until the middle of the month. That leaves investors asking if the bear market is over and what changes, if any, they should make in their portfolios at this time.
Expect the month ahead to provide guidance
While the rebound in the equity market at the end of March would seem to indicate that the US is on the verge of recovery, a more discerning eye would see that it’s not that simple. The impact of closing significant parts of the US economy will be felt more fully in the days and weeks ahead. The severity of the impact will depend on a couple of considerations.
How long will the vast majority of the US population remain in quarantine? The federal government has issued guidance for keeping social distancing restrictions in place nationally through the end of April. This national directive drives local quarantine restrictions. The end of April represents the earliest these quarantine restrictions could begin to be lifted.
Will the stimulus bridge the gap? Many small businesses, as well as the retail, restaurant, travel, and hospitality sectors, may be on life support. The financial stimulus that targeted these entities may not be sufficient or timely enough to allow these firms to avoid an eventual bankruptcy. Few business models can tolerate multiple weeks without revenue, even with some public assistance.
The key metric is time. By the end of April, we’ll have a better sense of the severity of the pandemic and the timeline for shuttered parts of the economy to reopen. We’ll know if federal stimulus dollars intended to bridge the financial gap for individuals and businesses most directly impacted by the quarantine have hit their mark. Finally, we’ll be able to observe how this crisis is playing out in countries ahead of the US in the pandemic curve, most notably Italy, France, and Spain.
What does this mean for investors?
Unfortunately, many investors hear the siren song of market timing in both good times and bad. When markets were falling precipitously, they wanted to sell their stocks to avoid potential future losses. Now that markets have partially recovered, some of those same investors want to rush in to buy equities, fearful they’ll miss out on future gains. In some cases, they validate their desire by looking at data from recent bear markets without understanding the ways this bear market is unique: It came at the end of the longest bull market in modern history, and it’s being driven by an exogenous shock.
We firmly believe that chasing returns in this manner is a losing bet. Don’t look at the shaky ground we currently stand on; instead, look out three to five years. If the events surrounding the pandemic have changed that longer-term view, then—and only then—should you consider making modifications to your portfolio. Don’t seek to manage your portfolio to optimize outcomes for the next three to six months. Making significant modifications in reaction to short-term market volatility is no recipe for success.
The bottom line
The longer that large segments of the broader economy remain shut down to address the medical crisis, the more likely that recovery will be delayed. Current volatility in financial markets reflects the uncertainty of that calculation. That’s why the next four weeks will be transformational. As noted in an earlier blog post, no one we know has the ability to time the market. Rather than play this loser's game, investors should continue to focus on the long term.
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Tom Lee, CFA, Chief Investment Officer, Equities and Derivatives
Tom leads Parametric’s Research, Strategy, Portfolio Management, and Trading teams, coordinating resources, aligning priorities, and establishing processes for achieving clients' investment objectives. Tom has coauthored articles on topics ranging from liability-driven investing to the volatility risk premium. He is a voting member of all the firm's investment committees. Prior to joining Parametric in 1994 (originally as an employee of the Clifton Group, which was acquired by Parametric in 2012), Tom spent two years working for the Board of Governors of the Federal Reserve in Washington, DC. He earned a BS in economics and an MBA in finance from the University of Minnesota. A CFA charterholder, Tom is a member of the CFA Society of Minnesota.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.