March 26, 2020 Update: Three timely perspectives about today's market

Beth Misak |

March 26, 2020

Market & Economic Perspectives

During these fast-paced times, it’s important to maintain perspective, pause and reflect. Part of that involves learning from past experiences and adjusting our sights on the near future. That’s why I’m sharing some timely observations from a number of other industry experts.

In short, we are likely to experience a sharp, yet short recession near term. Stock markets move in advance of actual events, and the recent sharp decline in stock prices is probably already discounting this eventuality. Individual investors seem to be buying on balance more than selling during the decline, telling us that those who are hanging in there are not alone. And, if past history bears out again, investors who are buying stocks, and those who are holding onto the stocks they have, will have a chance to reap potential rewards in the future.

Below, experts provide more insight with three market and economic perspectives.


Perspective on the Economy

According to Vanguard’s Global Chief Economist, Joe Davis, the U.S. economy is likely to contract by nearly 17% on an annualized basis in the next three months. This would be the deepest quarterly decline since the 1950s and will be a trying time for many people. He expects, however, that this could turn out to be among the shortest recessions in history. And, he anticipates we will see a rebound in growth in the following three months to mark the end of the sharp, yet short, recession.


Figure 1. A sharp but short recession

Figure 1. A sharp but short recession
Sources: Vanguard Expert Perspective, “A Sharp Contraction, Then An Upswing,” by Joe Davis, Global Chief Economist, March 22, 2020. Past data from the U.S. Bureau of Economic Analysis.


Perspective on Investor Behavior During the Recent Market Decline

We know that prices and markets decline when there are more sellers than buyers. The question is, who’s selling during the recent drop in stock prices? Apparently, it’s not the long-term individual investors, according to Jeffrey Kleintop, CFA, Senior Vice President and Chief Global Investment Strategist at Charles Schwab.

Kleintop points to the net cash inflows into exchange traded funds (called ETFs) that invest in stocks. He says, “Surprising many, passive ETFs have seen solid net inflows during March as the bear market took hold, according to daily ETF data tracked by Bloomberg.” He adds, “Passive ETFs tend to be favored by long-term individual investors.” So, according to Kleintop, more individual investors are buying rather than selling during the downturn, thus providing a stabilizing force for the market.


Figure 2. Monthly net cash flows to passive stock ETFs and stock market performance

Figure 2. Monthly net cash flows to passive stock ETFs and stock market performance
Source: Schwab Market Commentary Timely, “Who Fueled the Fastest Bear Market Ever?” By Jeffrey Kleintop, Chief Global Investment Strategist, March 16, 2020. Bloomberg data as of 3/14/2020.


Perspective on the Stock Market

U.S. stock market declined over 25% from the high point on February 19, 2020. There have been seven other such declines in the market since the early 1960s. History tells us that falling prices created the opportunity for favorable medium- to longer-term results. In times like this, the key is to focus on the future while holding onto lessons from that past that tell us the current market decline is likely sowing the seeds for future strong returns.


Figure 3. What happened after the market fell 25%

Figure 3. What happened after the market fell 25%
Source: Litman Gregory Portfolio Strategies, “Overcoming Panic in Volatile Markets,” by Litman Gregory Investment Team, March 17, 2020. Litman Gregory Analytics, LLC

To Recap:

  • The U.S. economy is surely heading into a recession due to the shut-down of schools, many businesses and the limitation on human interaction. However, one economist forecasts that this could turn out to be among the shortest recessions in our history.
     
  • Despite falling stock prices, long-term individual investors have been buying, not selling stocks. Cash flows for broad based stock funds have seen net inflows during the market downturn.
     
  • U.S. stock market has reached bear market levels in a record short period of time. History shows that markets have recovered and rewarded patient investors over the five-year and ten-year periods following the bear market.

 

I hope you found these three perspectives interesting and helpful. I remain confident and optimistic that we’re going to get through this together. The HearthStone team and I are here for you and ready to talk with you on the phone at any time.

Call 858.792.9122 or email info@hearthstoneinc.com

 

Paul Hynes, CFP®
President and CEO


The following articles were used as sources for this report:

Vanguard Expert Perspective, “A Sharp Contraction, Then An Upswing,” by Joe Davis, Global Chief Economist, March 22, 2020, found here.

Schwab Market Commentary Timely, “Who Fueled the Fastest Bear Market Ever?” By Jeffrey Kleintop, Chief Global Investment Strategist, March 16, 2020, found here.

Litman Gregory Portfolio Strategies, “Overcoming Panic in Volatile Markets,” by Litman Gregory Investment Team, March 17, 2020, found here.