The Bears Return Home (and Ruin Goldilocks’ Staycation)

No getting around it, the 1st Quarter of 2020 was rough. Large Cap U.S. stocks ended the quarter down 19.6%, International Large Cap stocks were down 22.7%, REITs down 23.4%, Emerging Market stocks down 23.6%, and Small Cap U.S. stocks lost 30.6%.[i] These statistics belie the full extent of the damage as markets tumbled from their peak on February 19th to their lows on March 23rd before rallying into the end of the quarter. At their worst, Large Cap U.S. stocks (S&P 500) had lost 33.8% and Small Cap U.S. stocks (Russell 2000) were down 40.6% – in a mere 23 trading days.[ii]

During this peak-to-trough decline, even traditional safe havens experienced some dislocation. Municipal bonds, for instance, were down over 8% in this time frame, and Global bonds were down more than 3% – yes, still a relative win.[iii] The crisis that began with concerns about economic supply, then demand, became a liquidity and perhaps, eventually, a solvency crisis.

Fortunately, our knights in shining armor have come to the rescue (yet again). As of the end of the quarter, global Central Banks, individual countries and supranational institutions offered over $7 Trillion in lending facilities and backstopped loans.[iv] Rates were again cut to the zero boundary, and maintained at less than zero in many cases internationally, while governments began working on – and eventually passed – significant fiscal relief.

The amount of support is staggering. Programs are too numerous to be a good use of your time to list here, but some of the efforts were more eyebrow raising than others. Here in the U.S., this “helicopter money” approach has seen the Fed backstop corporate credit risk, secondary market vehicles (like corporate bond and municipal bond ETFs), below-investment-grade securities, and indirect “direct” loans to “Main Street.” The global response to the crisis has been to do “whatever it takes” to offset financial market calamity.

Given the unprecedented halting of economic activity around the globe, it’s entirely prudent to do “whatever it takes” to help ensure the continued operation of the mechanisms that support commerce. The financial system is the equivalent of our body’s vascular system and the money (manufactured by debt) that circulates within it brings the oxygen to our vital organs and extremities. Without that, our body will die.

This time it is different – at least in part

We understand that many are frustrated by what seems to be a continued rescue of corporate America. The complaint oft heard during the Great Financial Crisis (GFC) was that we were in a period of “Lemon Socialism” – effectively, that we allowed for the privatization of profits and the socialization of losses. But this time is different. Losing 30,000,000 jobs in six weeks is materially more acute than the loss of 6,100,000 jobs lost during the crux of the GFC (9/2008-12/2009).[v] Further, economic actors did not create this reality, the government did.

Heading into this crisis, the U.S. had witnessed record household net worth ($115 Trillion) and debt service ratios at 40-year lows (9.7% of disposable personal income).[vi] Jobs were plentiful and unemployment notched its second-year-in-a-row with sub-4% rates.[vii] Wages increased measurably without sparking significant inflationary concerns. The chair, the porridge and the bed were just right. But prudent disaster planning would assume that during a normal recession, or even depression, consumers who could afford to spend would be allowed to spend. If the government tells you to stop going to work, it’s entirely reasonable to expect the government to pay you during the duration of the crisis.

Having said that, it’s likely that many weak players in corporate America will probably have their demise accelerated, not bailed out. Over-leveraged retailers and energy-related exploration and production companies come swiftly to mind. In spite of the litany of relief programs, we expect many of these businesses’ losses to be “owned” by debt and equity holders – and ultimately felt by their employees. Beware as the political discourse related to this challenge is likely to be heightened during this election season. What we know from history is that attitudes and approaches often change after these kinds of events, but the nature of these changes is fundamentally unknowable. Hardly anything lasts for “several decades” in the public policy realm.

What “shape” the Recovery?

We’re often asked about what “letter” we think the recovery will look like: Will it form the shape of a V or W or L? We can’t proclaim to have any better insights about the future than anyone else, but if we’re put on the spot, we’d likely look for more of a W-shaped recovery; maybe a “double-W” (but that’s not a letter!) At least such a decline as we’ve witnessed helps set the stage for longer-term higher returns moving forward. Witness the S&P 500’s 13% gain in April, the best monthly performance for that market since January 1987.[viii] That makes this a V-shaped recovery in the markets thus far.

Of course, the final shape of the recovery will be wholly determined by how the virus plays out. But what seems fairly certain at this stage is that until we have a vaccine, and perhaps only after seeing how well that vaccine actually suppresses virus replication rates, will we as individuals and communities start to normalize behaviorally. If we rush back too soon, we risk repeated shelter-in-place orders as infection rates spike.

Many of the issues related to the current virus are likely to be solved with time. We may luck out that it becomes hamstrung by warmer weather; this is supported by recent findings that suggest it does not spread well outdoors. But this would only be temporary until we find ourselves forced back inside come fall and winter. Fortunately, replication rates are moving in the right direction and in most states are now at a level that suggests declining cases. Whether this is the beginning of the end, or the end of the beginning, is up for debate.

Control what you can

In the meantime, what can be done to facilitate your personal long-term financial health? The first priority is to focus on your actual health, including paying attention to the recommendations being offered by health officials.

Assuming you remain healthy, the next step is to focus on what you can control. In many cases, that’s personal spending. Fortunately, one consequence of these shelter in place orders is that most people are finding themselves spending a whole lot less than they normally do. If you’re currently living off your portfolio, it may be prudent to attempt to reduce your portfolio distributions. If you’d planned a large or expensive vacation later this year, perhaps this would be the year to set your sights more locally.

If you’re younger and fortunate to still be employed and (hopefully) not seeing too significant a reduction in income, this might be a good year to consider increasing that 401k contribution. Or, if you’re already maxing out tax-deferred savings options, then consider opening a new taxable investment account. Doing so, historically, has generally been a good thing, but risks and uncertainty still abound.

We strongly discourage reactionary trading or action for the sake of “doing something” about your portfolio during a crisis. Ideally, well before this crisis, your advisor has worked with you to confirm your long-term objectives and assess your likely sustainability throughout a wide range of contingencies. At Halbert Hargrove, these analyses include a 1,000-scenario iteration of market returns, including periods where markets significantly underperform expectations. In addition, HH’s Resources and Claims Analysis can give you a real-time snapshot, a Personal GPS™ if you will, showing where you are on your lifetime financial-health journey. In combination, these efforts can help you see both the forest and the trees.

For now, until the larger crisis is known more fully and addressed more comprehensively, we all need to continue to tend our own financial gardens as carefully and thoughtfully as we can.

How do you balance having the life you want to enjoy today with what you’re going to need in the future? Are you doing what it takes to enter your dream retirement? TAKE OUR QUIZ to find out.


[i] Envestnet – Tamarac

[ii] Ibid

[iii] Ibid

[iv] Russel Investments: Economic and Market Review First Quarter 2020.


[vi] J.P. Morgan: Guide to the Markets – U.S. Data as of March 31st, 2020

[vii] U.S. Bureau of Labor Statistics

[viii] S&P Dow Jones Indices: A Division of S&P Global