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Time For A Mulligan

This quarter has been the worst quarter in over a decade.

The S&P 500 Index officially crossed into a bear market on 3/12/20, which is defined as a period in which an index falls 20% from a new high. This marks the sixth time in the last 40 years that the S&P 500 crossed into bear market territory.

Economists are left arguing what letter of the alphabet type of bounce back the market will see from here. A “V” shaped return would be a quick rebound from the bottom, a “U” shaped return would be a slower recovery, a “W” shaped return would be a volatile path to recovery, and the daunted “L” shaped would be flat lining out at the bottom for a long period of time. The only bear market in that time period to see closer to an “L” shaped return, which I will classify as the S&P 500 Index staying in bear market territory for at least 1 year from the start of the bear market, was the 2008/2009 Financial Crisis (Data from Factset).

The mitigation efforts to contain the spread of COVID-19 has rendered the global economy to a standstill, particularly in retail, travel, and leisure. Because of the fluid nature of containment of the virus, it makes it difficult to quantify the impact that COVID-19 will have on the economy, and thus, the stock market.

This is in contrast with the Financial Crisis in that the damage had already occurred, and it was a matter of economists tallying up the impact in its entirety. Entering into the Financial Crisis, the economy was on looser footing. Unemployment claims rose year over year in 2007, whereas, they dropped year over year in 2019. In the four quarters prior to the market entering bear market territory, the average year over year Gross Domestic Product (GDP) grew 2.3%, whereas, it only grew on average 1.6% heading into the financial crisis bear market (Data from Factset).

In the moment of a bear market, it’s difficult to see what is going to remedy the markets, however, there’s normally a combination of circumstances that arise to get the market, and eventually the economy, back on track. In this current bear market and resulting economic recession, we see all of those actions being taken. In this case, it is being done at unprecedented levels. According to the federal reserve’s website, since March 2nd through March 31st, the Federal Reserve has increased its balance sheet by nearly $1.6 trillion. This was used to infuse the financial markets with liquidity as the markets were facing unprecedented volatility, and thus, a lack of supporting volume. Below is a snapshot of the movements of the Federal Reserve’s balance sheet since 7/30/07 just to illustrate the drastic measures taken in such little time:

Source: Factset Research Systems