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The Ides of March: Pandemic Upends Markets, Economy

By Kara Murphy

The world has changed a lot since I wrote my last market commentary in February. Throughout much of March, global equity markets dropped swiftly as entire economies came to a virtual standstill as governments attempted to contain the spread of the novel coronavirus (known as SARS-Coronavirus-2). One of the longest and strongest bull markets in U.S. history officially ended on March 12, 2020, when the broad U.S. stock market, as measured by the S&P 500 index, tumbled by more than 20% from its most-recent peak. Interestingly, the bull market ended nearly 11 years to the day after it began.

Key Takeaways

  • One of the longest and strongest bull markets in history ended, but the bond market helped to buoy diversified portfolios.
  • The U.S. saw its first significant job losses in many years as the federal government rolled out unprecedented measures to support the economy.
  • The number of infections climbed worldwide, but other countries hit early by the coronavirus began to return to normal.

The dramatic events of the past month have understandably given rise to widespread fear and uncertainty. Individuals are concerned over not just their health, but also their investment portfolios and the outlook for markets and the global economy. In light of this, it seems fitting to dispense with my usual format for market commentaries in favor of one that seeks to answer some questions that may be top of mind for many investors.

To do so, I’ve drawn not only on various reports, but my own experience navigating past bear markets, starting with the dot-com bust. While each market crisis is unique, we can draw lessons from past experience that may help us navigate turbulent times, much like a lighthouse guides sailors when waters are choppy and visibility is poor.

How does the latest market crisis compare to previous ones?

Going back to 1945, there have been eight times when stocks have dropped by about 20% or more, based on monthly returns—the generally accepted measure of a bear market. On average, each of these declines was more than 30%.

One unique characteristic of the latest downturn is how swiftly it has played out. Previous bear markets have tended to take months, even years, to develop. By contrast, this decline took mere weeks as the U.S. stock market dropped by about 30% from its most-recent peak (on Feb. 19, 2020) to its late-March trough.

Despite the swiftness of this decline, both the economy and market were in relatively good shape at the start of the year. That firm footing contrasts in some ways with prior crises such as the dot-com bubble era and the period leading up to the global financial crisis:

  • At the start of 2020, stock prices, relative to earnings, were somewhat higher than historical averages but certainly not as high as they were during the dot-com bubble era. During that earlier period, stocks, particularly shares of tech companies, were quite expensive compared to other periods, leading then-Federal Reserve Bank Chairman Alan Greenspan to popularize the phrase “irrational exuberance.” Those high valuations left stocks vulnerable when economic growth stalled and investor sentiment shifted, leading to a sharp and prolonged selloff in the Technology sector.
  • When the coronavirus first hit American shores, consumers held less debt than prior to previous downturns. In 2019, the Goldman Sachs Global Investment Research (GIR) Financial Excess Monitor (page 10 of this report), which measures economic and financial-market imbalances, was slightly below historical averages and significantly below the levels seen during the era or in 2007, prior to the global financial crisis. One of the reasons for this is that U.S. households have had relatively high savings rates and relatively low levels of debt, including mortgage balances, in recent years.

The U.S. stock and bond markets have experienced wild swings recently, and we may continue to see high levels of volatility. In light of this, what should an investor do, if anything?

When the market is swinging dramatically from one day to the next, it introduces opportunities for investors to make mistakes—selling at the wrong time, or buying at the wrong time. It’s precisely for this reason that that the market tends to reward investors with a long-term focus — in other words, those who can look beyond near-term volatility as they work toward their financial goals.

We don’t know exactly when the market will fully rebound, but what I can tell you, based on past experience, is that there may be a stiff penalty for missing out on that recovery. Of course, we’re closely monitoring your portfolios and keeping a watchful eye on developments to assess how the pandemic and related issues might further impact markets.

Consider this scenario: Since 1992, the market has returned about 9.8 percent a year, on average. During this period, we’ve had three different bear markets. If a hypothetical investor (with a portfolio split evenly between stocks and bonds) missed out on the 10 best trading days during this period, his or her average annual return would have dropped from 9.8% to 7.1%. What’s more, if the same hypothetical investor missed out on the 50 best trading days during the same period, his or her return would have fallen from 9.8% to a mere 1%.

If you have concerns about your portfolio or financial goals, resist the urge to react to the latest headline. Talk to your advisor instead. That’s what they’re there for.

Bonds are supposed to help cushion diversified portfolios during periods of market volatility. Did they perform as expected during the recent selloff?

On the whole, yes. Let’s revisit the hypothetical investor discussed above. Between the market’s last peak on Feb. 19 and its trough on March 23, that investor would have experienced a loss of about 18%, versus a nearly 34% decline for the S&P 500 index, according to ISG.

That said, we saw some anomalies in the U.S. bond market last month. During a roughly two-week period in March, selling pressure increased dramatically in what are traditionally safe-haven areas of the market--namely short-duration Treasurys and municipal bonds—creating an imbalance that made it difficult to execute trades.

Sharp declines in stock prices — which set off a wave of automated efforts to rebalance portfolios that had drifted from their target allocations — appeared to fuel the imbalance by boosting bond selling and stock purchases. During a period of several days, stock and Treasury prices, which typically move in opposite directions, actually fell simultaneously.

Fortunately, in mid-March the Federal Reserve Bank stepped in to ease strains in the Treasury market by announcing plans to accelerate its planned purchases of the securities. Within days of its announcement, the Treasury market appeared much more orderly than it had been earlier in the month.

What sectors of the market have held up relatively well in recent weeks? Which have been hardest hit?

U.S. sector returns were negative across the board in March, but, as might be expected, certain defensive sectors, like Consumer Staples and Health Care, held up relatively well.

In recent months, Health Care has been caught in the crosshairs of the 2020 presidential campaign, fueling volatility in the sector. But the sector got a boost last month after former Vice President Joe Biden scored big wins on Super Tuesday. Biden is widely seen as less disruptive to the industry than other former contenders for the Democratic nomination. The pandemic has buoyed demand for shares of certain pharmaceutical firms, telemedicine providers and even drug store chains.

Energy was the worst-hit sector in March, falling nearly 35% and some 53% for the one-month and trailing, 12-month periods, respectively. The sector has been battered by plunging oil prices, which in late March hit an 18-year low in the U.S., coupled with falling demand for oil as the pandemic slows economic activity and global travel.

What is your outlook for the economy? Do you see signs that the pandemic and its economic toll might not be as severe as many people fear?

It’s hard to tell exactly how the pandemic will ultimately affect the global economy, but we are anticipating a sharp drop in growth for the first half of the year. It’s certainly safe to assume that the longer this crisis goes on, the bigger the toll it will take in human and economic terms.

We’re already seeing significant job losses in certain U.S. sectors, from retail to hospitality, as authorities in several parts of the country order non-essential businesses to close temporarily and consumer spending wanes. Business revenue is plummeting in many industries as normal economic activity shuts down, according to an analysis by Goldman Sachs.

On March 31, GIR lowered their 2020 forecast for U.S. GDP growth to -6.2%. Quarter-over-quarter forecasts show dramatic changes—GIR estimates real GDP growth of -9% in the first quarter, and -34% in the second quarter, on an annualized basis. The forecast, again as of March 31, 2020, includes a rebound in the third quarter with annualized growth of 19%, and further growth of 6% in the fourth quarter.

Amid a tidal wave of troubling news, it can be difficult to find reasons for optimism. But we’re beginning to see a few rays of light shine through the darkness:

  • The Federal Reserve has wasted no time injecting a massive amount of liquidity into the economy. In March, the central bank made two emergency cuts to its benchmark interest rate and unveiled other measures—including lowering capital reserve requirements for banks and committing to buy corporate debt—designed to keep the gears of financial markets turning smoothly. The Federal Reserve seems to be drawing from its playbook developed during the financial crisis, when the central bank learned the benefits of moving quickly and aggressively.
  • Congress and the White House passed a trio of fiscal stimulus measures last month, including a $2.3 trillion spending bill that is unprecedented in scale and breadth, according to a report released in late March by the Goldman Sachs Private Wealth Management Investment Strategy Group (ISG). Just like social distancing measures are designed to lower the peak of the pandemic, the federal government’s monetary and fiscal programs are designed to temper the decline in the economy and make the trough of economic activity shallower, ISG reports. Washington is already considering a fourth response package, and the Federal Reserve has indicated that it will continue to use its tools to support the flow of credit to households and businesses.
  • Infection numbers have continued to increase worldwide but, as of late February, there were nearly 40 programs underway to develop vaccines and nearly 10 programs to develop therapeutics, according to ISG. The U.S. National Institutes of Health has already begun a clinical trial of one vaccine and is gearing up for a clinical trial of a promising antiviral treatment.
  • Life in China, the initial epicenter of the pandemic, appears to be slowly returning to normal. The Chinese economy was widely expected to contract sharply in the first quarter, but factories are restarting, stores are opening and more people are venturing outdoors, according to published reports.


The recent changes in our lives, the global economy and the markets have been swift and shocking. Many of us have been affected by the pandemic in some way, whether we’re working from home, trying to manage a business in this period of upheaval and/or worried about our own health or the health and safety of family and friends.

As we ride out this storm, it may be helpful to think about our own efforts to stem the spread of the novel coronavirus by hunkering down as a metaphor for navigating the choppy waters of today’s market by staying focused on our long-term financial goals.

Invest well and stay healthy,

Kara Murphy, CFA

Chief Investment Officer

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Index Definitions

S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.

Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.

MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.

U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.

Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.

Kara Murphy

Kara Murphy

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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