Portfolio Research Director Kevin E. Donovan shares his thoughts on a volatile first quarter and what to look for in the days ahead.
Hello. I’m Kevin Donovan, Portfolio Research Director at CJM Wealth Advisers. I’m here to talk about the first quarter. The first quarter was historic for a number of reasons. The most important of course was the coronavirus and its impact on the health of people in the U.S. and around the world, but also the impact that virus has had on the economy and the stock market. It’s hard to believe that just six weeks ago we were at stock market highs. We were in the longest bull market in history.
It lasted for 11 years, and then everything seemed to stop all at once when the impact of the coronavirus became more apparent. The economy basically, large portions of it shut down. Retail, travel industry, restaurants, all ceased to operate pretty much at the same time as states issued stay-at-home orders, and their businesses just collapsed. Now, add to that a sharp decline in oil prices caused energy companies to sell off sharply, and also lower interest rates hurt financial companies, so those stocks did poorly as well. So a lot of different reasons. A lot of different things came together at one point in time.
Now, that longest bull market in history turned into the fastest bear market in history. Off those highs that we reached in February, we fell 20% faster than at any time in the past. Now, the thing that is different this time, than say in 2008, is that we’ve had a much faster response by central banks around the world and governments. Here in the U.S. the Fed lowered interest rates dramatically, close to zero. They restarted a quantitative easing program, so they’re buying back bonds. That’s adding liquidity into the bond market, which it needs to function well. The federal government has passed some stimulus measures, and that seemed to have a calming effect on the market. For a while now we’ve stopped seeing the five, to seven, to eight percent sell-off days in the market that we saw repeatedly before that happened.
So things seem to have calmed down a bit at the moment, but there are some things we need to look forward to. For one is, how bad unemployment’s going to get. Just a week and a half ago, we saw the most initial jobless claims in one week that we’ve ever seen in our history. That was about three million people filing for unemployment in one week as all those retail, transportation, restaurant, et cetera, all those workers were thrown out of work. We’re also seeing sharply lower economic forecasts by economists for the second quarter for GDP. Those range from an annualized rate of a 10% decline, to the most recent one yesterday was 34% decline on an annual rate. We’ll see how that plays out, but the forecasts are coming way down.
We were also just about to enter into earning season for the first quarter, which expected earnings for the S&P 500 is expected to be lower this quarter compared to last year. Then the second quarter, which will come out in about three months, those earnings are expected to be sharply lower than they were the year before. These are things we need to look out for going forward. As you look at your quarterly reports of your performance and your portfolios, they will be negative. But they won’t be as negative as the stock market numbers. Basically that’s because as we say over, and over again here at CJM, we believe in diversified portfolios. You own a mixture of stocks and bonds, and the bonds help to cushion the stock market losses when it sells off strongly like it’s doing right now. Also, it helps to reduce volatility.
Now, high quality bonds did increase over the quarter slightly, but lower quality bonds like corporate bonds, things that aren’t government guaranteed, and high-yield bonds, did finish the quarter lower, but not as badly as stocks did. So they did provide their function of reducing the volatility and cushioning the blow of sharply lower stock prices. Looking forward, it all depends upon the length of the shutdown. We have to see what the health impact of the coronavirus will be as we go on. There have been some dire warnings about expected death rates in the past few days. We’ll see if that plays out, and how long the shutdown will last.
Also, how fast people start returning to normal. How fast we go back to work. I’m obviously doing this from home because we’re doing social distancing at the office. Then also, how fast people get back to normal, how fast people go back out to restaurants. Some people may be raring to go as soon as the restrictions are lifted, and some may be a little bit more cautious about being around people. We’ll have to see how this all plays out. Yet and again, this is why we are diversified. This is why we hold a variety of mutual funds and ETFs in different asset classes. As we start the second quarter, the most important thing of course is the health of you and your family, and we wish you the best in the coming days. Thank you.