During Recessions, Stocks Have Historically Rebounded Before Earnings
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 4/03/2020. Rates and Economic Calendar Data from Bloomberg as of 4/03/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets edged lower last week but not without the arduous pushing and pulling we’ve become accustomed to throughout the last couple of months in 2020. In the U.S., the S&P 500 Index fell to a level of 2,489, representing a 2.02% loss for the week. Smaller capitalized companies were hit harder as the Russell Midcap Index retreated 5.72% and the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -6.99%. On the international equities front, both developed and emerging markets also finished in the red, returning -3.69% and -1.18%, respectively. Finally, the 10-year U.S. Treasury yield settled in at 0.62%, down 10 basis points from the previous week.
A number of companies have been relatively transparent by providing on-demand operational updates during the current crisis. Our first official glimpse into company financials is right around the corner with first-quarter 2020 earnings season, and it is well documented that earnings and forward guidance will likely be abysmal. The silver lining here is that this is not new information. The stock market crashed, and much of the anticipated negative data may already be priced-in based on the depressed valuations of many stocks across the global equity markets. This does not imply that the days of volatility are behind us or that we won’t retest market lows if virus infection data gets worse.
It is becoming more apparent that the aftershock from the novel COVID-19 virus will likely put a drag on company financials long after we’re through this pandemic. From an investment standpoint, we are primarily concerned with when the markets will take a turn for the better in a sustainable manner. While we don’t know when this will occur, the good news is that it is likely to happen long before company revenues and earnings recover to previous highs. History can provide us with some insight into what occurred during previous recessionary periods.
There have been three recessions over the last 30 years; the Gulf War recession in 1990, the dot-com bubble of 2001, and the financial crisis of 2008. In each of these recessions, the primary driver(s) were unique, as is the case with our current situation. According to Barron’s, during the 1990 recession, it took the S&P 500 Index less than a year for sales to recover, several years for earnings to hit new highs, but less than two quarters for stocks to bottom out. In 2001, and again in 2008, it took sales and earnings several years to reach new highs while the market bottomed one-two quarters before the worst numbers were reported.
In our current predicament, the major unknown in the equation will continue to be the severity and duration of COVID-19. We will likely continue to experience sharp market volatility, record unemployment numbers, and a massive hit to GDP over the next two quarters. Still, we continue to monitor key indicators as we search for the market bottom. Key indicators such as a decrease in COVID case and death rates, encouraging unemployment and jobs data, and less intense market declines with lower volatility to help support markets. Just this week, Monday’s gains on the back of promising virus-related data erased all losses from last week. This may prove not to be sustainable but it was certainly a welcomed move higher.
As always, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
Disclosure: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid-cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.