economic update Q1 2020

The world had high hopes for 2020. With the start of a new decade came excitement and anticipation. But no one could have predicted just how memorable of a year this one would be. During our April 30, 2020, economic update webinar, we took a look at the data.

2020 started out strong (see our prior economic update). Unemployment and interest rates were low, and the stock market was hitting new highs. But in March, the presence of COVID-19 in the United States flipped our economy upside down. Millions of people have been diagnosed with the virus globally, and hundreds of thousands of people have died as a result. While the number of new cases is currently on the decline, public health authorities don’t think the crisis is over yet. Many warn of a potential second wave of the virus in the coming months.

To stop the spread, government officials instituted stay-at-home orders and closed non-essential businesses. While these measures undoubtedly saved lives, it’s taken an enormous toll on the country’s economy and market. Unemployment rates skyrocketed in March, with millions of people filing for assistance. As those numbers continued to rise, the stock market went in the opposite direction and crashed by more than 30% in a matter of days. We have seen the market recover quite a bit since mid-March. However, if the number of coronavirus cases spikes again, as some predict, it’s likely we may see another dip.

COVID-19 isn’t the only factor affecting the market. Around the same time that the pandemic became a global event, an oil price war broke out between Saudi Arabia and Russia. Over time, it’s become clear that the target of this price war was the oil and gas industry in the United States. Energy sector stocks have taken a hit, but it’s had much less of an impact on the market than expected. Keep in mind, today the entire energy sector combined is about half the size of Microsoft or Apple.

Are we in a recession? Unofficially, yes. The market contracted in Q1 and saw a drop in GDP. This will likely happen again in Q2, which meets the qualifications for an economic recession. When investors hear this news, their gut reaction tells them it’s time to sell their stocks. We encourage our clients to hold tight. The market’s volatility and uncertainty may seem worrisome, but if you look back at historical trends, there is no doubt in our minds that the market will rebound. As we compare the stock market crash of 2020 to the crash of 2008, we see stark differences that lead us to believe the crisis will pass sooner rather than later, and that the recovery will be much greater and more rapid this time around.

So far, the federal government has distributed $2.7 trillion in stimulus funds, most of which have been used to fund the Paycheck Protection Program. The key that drives market recovery is how quickly companies can return their earnings and sales back to some sense of normalcy. Now that many stay-at-home orders are expiring across the country (including Florida’s) businesses are starting to reopen. The sooner consumers can return to their pre-crisis spending habits, the sooner we’ll begin to see our economy level out again. If the number of new cases remains the same or declines, the economy can continue to reopen and recover.

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Special thanks to Matthew Treskovich, Chief Investment Officer at CPS Investment Advisors, for sharing his insights on this webinar.