Last week was one of the best ever for domestic equity markets. Since the March 23 low, the S&P 500 has gained roughly 25%, bringing the index back to levels from mid-2019. The index is down, however, about 18% from its high from early 2020. Markets surged not only on generally positive trends regarding infections, hospitalizations, and deaths due to COVID-19 but also on additional actions by the Federal Reserve to shore up the domestic economy. On Thursday, the Fed announced an unprecedented expansion in its asset purchase program to include junk bonds and promised another $2.3 trillion in loans to small businesses and municipalities. Additionally, OPEC and Russia agreed on an oil production cut, the amount of which slightly disappointed markets, but the fact that they made any deal at all is encouraging.
While the Fed actions and recent rally are certainly good news for financial markets, recent history has taught us that sharp rallies in bear markets may be short-lived. During the 2007-2009 crisis, for example, the S&P 500 first fell by 18% in October 2007 and had two rallies over 10% until finally finding a deep bottom in March of 2009. We believe this pattern may continue during this crisis, with relatively steep declines occurring based on bad news or poor economic data followed by short-lived rallies. For this reason, we continue to counsel patience and for investors to wait for opportunities to dollar-cost average into equities to build toward policy weights over the next 12 months.
This coming week, there is likely to be increased focus on when sheltering restrictions may begin to be lifted across the country and when non-essential workers might return to their jobs. An attempt at a “return to normalcy” too soon may cause this crisis to drag on for longer, while extended periods of time with severely limited economic activity could cause long-term economic damage. These decisions will be difficult and potentially an impossible needle to thread, and we will be watching these trends closely. While we hope no further economic and market deterioration occurs, we currently feel the probability of further downside risks far outweigh the upside.