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important questions and answers about recent market volatility 


March 12, 2020

The Mather Group continues to monitor the interplay between market volatility and the spread of the COVID-19 virus. Thus, we would like to share with you our current outlook, framed within the context of six primary questions discussed recently by members of our Investment Committee. If our outlook changes, we will share further updates with you, of course. 

What was the state of the US economy before the onset of COVID-19?

For someone observing the state of the US economy at the close of 2019, the outlook for 2020 could only seem bright. The economy created 2.11 million new jobs, and the unemployment rate fell from 4.0% at the start of 2019 to 3.5% at its end. Mortgage rates fell from 4.58% to 3.97%, supporting the sale of 6 million homes. Median household income grew 2.1%, while inflation remained tame at 1.3%. Despite concerns about increasing household debt, it actually fell to 76% of GDP in 2019, well below its 100% level in 2009. Consumer confidence rose from 122 at the start of the year to 128 at its end. Corporations prospered as well, with profits rising to $8.2 trillion in 2019. GDP grew at a 4.1% rate, well above the global rate of 2.9%. Finally, as a reflection of many of these factors, the S&P 500 rose 29% in 2019, well above its long-term trend, dating back to 1957, of 8% annually. Indeed, optimism about the economy in 2020 appeared to be very well founded.

What are the social and economic effects of the virus, and how significant are they?
With so many unknowns in this early stage of the virus, fear and uncertainty have become international hallmarks around the globe. Limiting population mobility, as enforced by several governments, has numerous and critical economic effects.  Such restrictions dampen consumer spending, impact workforce productivity, reduce demand in sectors such as travel and hospitality, and disrupt long-standing industrial supply chains. China, for example, is expected to see its 2020 GDP growth fall from 6.1% to 4.9%, for a loss of $2.8 trillion in goods and services. As it constitutes 17% of global GDP, the latter is now expected to fall from 2.9% growth to just 2.4% instead, for a parallel loss of $15.0 trillion. No major economy appears immune, with Japan’s GDP expected to lose $1.0 trillion due to the virus, and the Eurozone’s already weak GDP to fall by a further $6.2 trillion. US GDP impact is forecast to be $3.7 trillion lower, but, like the others, this is a preliminary estimate. As actual GDP numbers are not posted until several months after a Quarter ends, it will be late Spring before the current impact is known.

Why are these effects creating such volatility in the equity and credit markets?
Markets and investors abhor uncertainty. One unfortunate result, as shown recently, is frequent panic selling by both institutional and retail investors. Although many pundits are offering projections with respect to consumer spending, corporate profits, interest rates, stock market returns and credit market liquidity, too little information exists today to support anything other than pure speculation. As an example, no one predicted a 30% fall in oil prices would occur last weekend, which has further heightened uncertainty in the credit markets. In addition, the widespread use of algorithmic trading strategies by hedge funds and other institutions has reduced equity market liquidity significantly, also contributing to these higher levels of market volatility. A somewhat delayed governmental response to the virus is also concerning to many investors. Some fears are valid, however. A short-lived reduction in corporate profits may delay some planned corporate investments, and could lead to further expense reductions and employee layoffs. Consumer optimism, a key driver of spending on big ticket items such as autos and appliances, may fall as well.

How are governments, central banks, and corporations responding to the virus and market volatility?
Governments, whether local or national, are following the public health interventions which occurred during the SARS and avian flu outbreaks. These include isolating cases, quarantining their contacts, advocating “social distancing”, closing educational and other public institutions, banning large gatherings and limiting population mobility. For economies such as the US, in which consumer spending represents about 70% of GDP, governments are evaluating fiscal initiatives, such as tax cuts, to help maintain consumer spending. Central banks are reducing their target lending rates and increasing bond purchases to assure sufficient credit market liquidity. Corporations are implementing work-from-home strategies, as well as dispersing their workforces across an increased number of sites. In addition, corporations are reevaluating the structure and location of their supply chains, many rethinking their reliance upon Asian suppliers. Although sometimes late in acting, governments, central banks and corporations now appear to be joined together in a concerted response to the virus.

What is the potential outlook and timing for a recovery?
The initial success of these public health initiatives may be augmented soon by the arrival of warmer weather, which could dampen—but not eliminate—the virus. However, as the primary source of recent market volatility has been investor fear and uncertainty, the SARS outbreak might provide a baseline—but not a prediction—for future outcomes. In the midst of SARS, US consumer confidence fell to 77.6, but, within 10 months, it had recovered to 103.8. While consumer spending will be curtailed somewhat due to limited mobility, it is important to note that over half of all consumer spending is actually non-discretionary. More specifically, items such as shelter, food, insurance premiums, taxes and other staples will continue to be consumed, although likely driving a greater use of online shopping.  With respect to market recoveries, within six months from the peak of SARS infections, the S&P 500 had risen 21.5%. Six months after the peak of Swine Flu, it rose 10.1%, and six months after Avian Flu it rose 39.9%. Again, these three pandemics can provide a potential baseline for eventual recovery, but each had its unique profile. Examining China’s recent experience with the virus, as shown in the graphic below, demonstrates the potential success of their ongoing public health initiatives, albeit they are more draconian than those envisioned by many Western governments at this time.

What should I do-or continue to do-while this volatility continues?
Your personal financial plan is the roadmap to guide you through times of market optimism and, especially, in times of market volatility. But your plan and its underlying assumptions are not intended to remain static. You might review your near- and long-term liquidity requirements, or even your target retirement date. Has your risk tolerance profile changed, and in what manner? As tax season is upon us, you might focus upon identifying tax planning opportunities which may have arisen, just as The Mather Group is doing now with its tax-loss harvesting strategy. Credit opportunities, such as mortgage refinancing, are especially opportune during periods of central bank rate reductions. If any of these circumstances reflect your financial outlook, then personal counseling by The Mather Group’s professionals is only a telephone call away. And, if your plan warrants any revisions, we welcome the opportunity to start working with you now to update it.


The opinions expressed, and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on The Mather Group's research and professional experience and are expressed as of the publishing date of this communication. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation. Past performance is not indicative of future results.

Sources: Bureau of Labor Statistics; Brookings Institution; OECD; Census Bureau; Federal Reserve Bank of St. Louis; International Monetary Fund; World Bank; Wall Street Journal; Worldometer; Mortgage Bankers Association; U of Michigan Consumer Sentiment Survey; Kensho Research; Department of Commerce.



The Mather Group



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