The outset of the 2020’s will be remembered for COVID-19, a global pandemic that shocked financial markets, the healthcare system, and our very way of life.

Over a 30-day period the U.S. stock market fell over 30% making it the swiftest and steepest bear market in history.

Generally speaking, as stock prices fall, forward looking returns rise. Therefore, our below-average outlook from the beginning of the year has improved. Depending on your specific circumstances, it may make sense to shift some “safe” money into stocks if markets continue to fall.

While the news may sound dark and hopeless at times, remember the world has faced many challenges and economic downturns and has always come out the other side. We are all facing unique risks and unknowns today, but we will bet on our resilience.

We are living through an extraordinary period in history that none of us will ever forget. The impact on our families, communities, and country has been profound. While several weeks ago we had reason for cautious optimism that the coronavirus might be largely contained to China, it is now obvious that is not the case.

The United States and world are now facing the dual threats of a health crisis and an economic crisis. Both need to be fought with monumental government policy responses and individual behavioral changes.

We’ve frequently said that recessions and bear markets are inevitable phases within recurring economic and financial market cycles. We’ve also said there is always the risk of an unexpected “external shock” to the markets and economy (e.g., a geopolitical conflict or natural disaster). Investors need to be prepared for both to happen, but their precise timing is consistently unpredictable.

It’s one thing to say it and another to actually live it. But we will get through this crisis period. Things will improve and recover. Most importantly, we sincerely hope you and yours are able to remain healthy and manage well through this challenging period.

The global economy suffered in the first quarter as a result of the novel coronavirus

The first quarter of 2020 has proven to be unprecedented for financial markets. U.S. stocks fell into a 20% bear market in the shortest time ever. They continued to drop and declined 30% in a record 30 days!

Volatility, as measured by the VIX, reached its all-time high on March 16. Oil’s 25% drop on March 9 was its biggest one-day drop since the 1991 Gulf War. Finally, 10-year and 30-year Treasury bond yields fell to all-time lows of 0.54% and 0.99%, respectively!

Larger-cap U.S. stocks fell 20% this quarter, having rebounded a bit from their historic drop. Smaller-cap U.S. stocks did even worse, falling 31%. Foreign stocks also suffered significant draw-downs, as developed international stocks and emerging-market stocks both dropped around 24% (the dollar appreciated again in the first quarter).

Bonds once again played their key role as portfolio ballast against a sharp, short-term stock market decline. However, outside of Treasuries, most fixed income securities were down slightly due to credit and liquidity concerns. Investment-grade corporate bonds were down 4%, while higher-risk high-yield bonds suffered larger losses, dropping around 13%.

Economic outlook for a recession

We entered the year with an outlook for a moderate rebound in the global economy (especially outside the United States) on the back of reduced U.S.-China trade tensions and extensive global central bank monetary accommodation.

Our base case now is that the U.S. economy is headed into recession in the second quarter. It is likely to be a severe one, with a sharp contraction in GDP and an unprecedented rise in unemployment.

The near-term economic damage from the United States’ and other countries’ response to the virus now looks almost certain to be severe (barring some unexpected major medical breakthrough in the near future). The depth and duration of the recession—and the strength and timing of the ensuing recovery—depend on two key variables:

1. The effectiveness of our medical response and social policy efforts in flattening the curve
2. And the speed and effectiveness of our fiscal, monetary, and regulatory policy response

The Federal Reserve and other major central banks seem to have gone all-in to support the fluid functioning of credit, lending, and financial markets. At the same time, governments around the globe understand something massive needs to be done quickly on the fiscal policy side.

On March 27, Congress passed, and the president signed into law, a $2 trillion stimulus package. Similar support measures are being debated or implemented around the world. Discussions continue about additional steps to take in support of markets and the economy.

Positioning your portfolio through the COVID-19 pandemic

When stock prices—or any asset’s prices—drop, forward-looking returns rise. Therefore, our outlook for U.S. stock returns have improved with their cheaper valuations. As stocks soared in 2019 and the bull market became the longest in history, we suggested clients consider ratcheting down exposure to stocks.

Many clients that did so are now asking if it us time to unwind that strategy. Given the still-negative trajectory of the virus in the United States and the unknowable economic impact it will have, the answer is, as always, it depends on your specific circumstances.

For those that did reduce exposure to stocks and have longer-term time horizons (and strong stomachs), it may be time to start dollar cost averaging back into the market on dips. For those that are still over-allocated to stocks, it may make sense to reduce stock exposure after rallies. And for most clients, the answer is likely do nothing; through the normal course of management we will eventually rebalance your account, either partially or entirely back to target, when we see fit.

The Bottom Line

During these unprecedented times, it is paramount to stay disciplined and recognize when emotion rears its head in investment decision making. If we invest based on emotion, we are very likely to exit the market after it has already dropped meaningfully, locking in losses. By the time the discomfort and worry are gone, the market will already be much higher. That is not a recipe for long-term investment success.

Global markets have endured severe challenges and economic downturns in the past and have always weathered the storm. Attempting to time the market’s tops and bottoms is a fool’s errand; however, incrementally adjusting portfolio allocations in response to changes in asset class valuations, expected returns, and risks can be highly rewarding to long-term investors.

The precipitating event for the recent volatility is something none of us have experienced before: a global pandemic and an extreme societal response. Most Americans now live under lockdown. Our medical infrastructure could be overwhelmed. We are probably already in a global recession. Facing this dual medical and economic crisis, the situation is likely to get worse before it gets better. But it will get better.

The future is uncertain but our investment playbook remains the same: diversify; balance long-term returns with short-term risks; buy low into fear, sell high into greed. Stay the course.