Wooden Blocks U, V, W and L

As the Economy Rebuilds, What Shape Will the Recovery Take?

April 13, 2020
Mike MorelandBy Mike Moreland
VP - Investments

It was another week of superlatives leading into Easter and Passover observations.

On the economic front, we witnessed another report of record initial claims for unemployment benefits, with total filings approaching 15 million in the last three weeks. The worst-case estimates of the impact of shutdown actions are rapidly coming to pass. We will see first quarter GDP estimates in the near future, but the sharpest declines will be recorded in the current quarter. An annualized decline in output in excess of 30% is a distinct possibility.

The Federal Reserve expanded its efforts to backstop the financial system last week, announcing a $2.3 trillion program to support increasingly troubled corporate and municipal bond markets. This action, focusing on ‘high yield’ market sectors most affected by liquidity and credit issues, marked the Fed’s first significant step into the municipal and non-government sectors. It is a clear indication of the ‘anything it takes’ operating philosophy of the Fed in the current environment.

This action, plus early indications of a flattening of the COVID-19 growth curve, produced sharp gains in financial asset prices. The S&P 500 rose over 12% last week, its best one-week advance since 1974. This major large-company benchmark is up by nearly 25% since the low point in late March. While we remain down by double-digits for the year, recent activity strongly suggests that ‘looking over the valley’ is becoming a dominant market theme.

As such, attention is now turning to speculation of when and how quarantines and government-mandated shutdowns will be lifted. These steps will determine whether the ultimate economic recovery is in the shape of a ‘V’, ‘U’, ‘W’, or worst case, ‘L’. Financial markets are behaving as if the recovery will be as sharp as the downturn. Time will tell, but our opinion (and that’s all it is) is that governments will err on the side of caution and the reawakening of the global economy will be more gradual as a result.

What should we do when uncertainty rules? Our message -- and our actions -- are consistent. We do not engage in or encourage market timing. The path to success is to choose an allocation appropriate to your goals and risk tolerance. Rebalance to long term targets when market movements push allocations out of balance. Lastly, stay diversified. One of the best ways to reduce volatility is to spread risk among different asset classes and market sectors.  Sometimes there are few places to hide, but over time broadly diversified portfolios will smooth the inevitable rough spots.

And, as always, talk to us. We do not have all the answers, but we will provide a neutral view of your position, our plans, and the opportunities and risks available to you. We will work together to help ensure you reach your financial goals.

About the Author

Michael Moreland

Mike Moreland is Vice President of Investment Services at Security National Bank. With more than 40 years of Wealth Management experience at SNB, and his Sioux City roots, Mike has a rich background in finance and Siouxland.