Tim Hoyle, CFA, Co-Chief Investment Officer
John Donaldson, CFA, Director of Fixed Income
Maxine Cuffe, CFA, Senior Research Analyst
A Recession Like No Other
We are facing a recession like no other. Never before has a recession been accompanied by so much quality family time! Large swaths of the economy are closed for business. Never before have whole sections of the economy closed like this. Never before has the call to act for the greater good meant staying put. Never before has the trajectory of the world changed so abruptly. Never before has the 10-year yield, and the market so abruptly traded into bear market territory. Many economic models now predict that GDP will decline by over 5% this quarter and up to and maybe greater than 20% during the second quarter. But the sharper the contraction, the greater the bounce back. And we will bounce back. “For myself I am an optimist, it does not seem to be much use, to be anything else .” Winston Churchill once said. The government response to the corona virus is on a magnitude unlike anything we have ever seen.
This feels really bad, not only because we are in a recessionary bear market, but because it happened in only 16 trading days. But it has been worse; believe it or not. During the last 45 years, we have experienced five bear markets worse than this one. Yet, in our opinion, stocks remain the greatest wealth generator of all time.
According to Morningstar Research, on average bear markets last for 20 months, while bull markets go on for 63 months. This has been the quickest decline in history, which we guess should be expected since everything now happens quicker. Hopefully, the swiftness of this drawdown means the recovery will also occur in quick fashion.
Earlier this year, we estimated that forward 10-year returns would be below average. The bright side of this decline: our estimates show that forward return expectations are higher. Don’t fall into the trap of thinking that recent poor returns means that we will have five years of poor returns. Many Quality companies believe a vaccine is out there waiting to be developed and are rapidly trying. Doctors are testing drugs that already exist to combat the virus. Relief is on the way from our medical professionals and scientist. We all just need to heed the call of social distancing to reduce the amount of us who get sick, so that our hospital systems do not become overburdened.
We still believe equities will be the best performing asset class over the next five years. Approximately 90% of dividend paying stocks yield more than the 10-year bond, which means they have a massive head start in the race for total return. During any five-year time period in history, the chances of a negative return for stocks is only 13%. We are likely now living in that 13%. There is an 87% chance that the world looks significantly better in the not too distance future.
Stay home, stay healthy, and enjoy time with your loved ones.
The latest government advisory calls for social distancing to last through April 30th.