Reaction to COVID-19 has pushed us into recession, but it may not be a typical recession, and the Federal Reserve throws another lifeline to businesses. Looking at the numbers, it’s possible the S&P 500 Index can survive this storm and end the year in the positive.
Stocks had their best week since 1974, yet the headlines showed the United States now has more cases and deaths from COVID-19 than any other country. The worries remain, but as quickly as stocks sold off, they are now bouncing back on optimism over cases peaking soon in the United States and the dual benefits of monetary and fiscal policy.
A Recession is Here
Although it isn’t official yet, our economy likely entered a recession in March, ending the record 128 months of expansion. With much of the economy at a halt, many are now looking for second quarter gross domestic product (GDP) to be down anywhere between 20% and 40%. As the LPL strategists note, 17 million people have lost their jobs over the past three weeks, which means this will be a vicious recession, but they also think it can be a quick one. The shortest recession ever lasted only 6 months, and this could be even quicker.
The Fed Does it Again
On April 9, the Federal Reserve (Fed) announced $2.3 trillion in new loans to help support the economy. The LPL strategists explain the package will include loans to small and mid-sized businesses and provide support for state and local governments, along with a commitment to buying “fallen angel” debt like high yield. As a result, high-yield debt had one of its best days in history, which helped calm fears about various companies that have debt in this space. Many said the Fed was out of bullets four weeks ago when they cut rates to 0% and announced unlimited buying of bonds, but it is clear they had plenty of ammunition left.
A Big Down Year Isn’t Normal
The S&P 500 Index was down 34% year to date just three weeks ago, which would rank 2020 (so far) as one of the worst years ever for stocks. The good news is that big down years (worse than 20%) are much rarer than big up years (up more than 20%). In fact, since 1950, the index has closed the year down more than 15% only four times. Although there is plenty of time left in 2020, the LPL strategists expect this year to end up closer to the middle of the years shown below in the chart, not with some of the worst ever on the left.
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References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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This Research material was prepared by LPL Financial, LLC.
For Public Use — Tracking #: 1-978151 (04/21)