I live in a Jeopardy! house. Liz and I have, for as long as I can remember, recorded Jeopardy! each night. Usually, we play after the kids have gone to bed as a way of winding down. Recently, the Final Jeopardy! answer (or is it the question?) was about the classic book A Tale of Two Cities by Charles Dickens. Famously, that book begins “It was the best of times, it was the worst of times…” and while clearly that passage was not written about the stock market in 2020, it certainly could have been.
In March, as the US economy ground to a halt due to COVID-19 and “stay at home” orders, the S&P 500, a broad measure of large cap stocks, continued the dive that began in late February. From February 19 through March 23, the S&P fell a staggering 34%. A late March rebound meant that the index fell “only” 12.35% for the month, its worst since the 1930s. Small caps, as measured by the S&P 600, dropped by nearly 22.5% in March.
In contrast, April was the best month in the markets since 1987 with the S&P 500 rising more than 12.8%. The strong performance was despite the oil market collapsing to unprecedented levels, COVID-19 cases and deaths remaining a constant presence, and the continuation of “stay at home” orders in much of the world.
So, why the positive turn in the market? I think were three key factors:
- Government intervention: Specifically, the CARES Act which provided relief and stimulus to businesses and citizens. While I can, and will, argue that the size of the bill is too small (even after the supplemental bill was passed in late April for another $484 billion) the speed at which the programs were implemented and cash distributed was historically impressive.
- Rational thought returned: The selloff in March was indiscriminate. Outside of a select few companies, such as Clorox, prices dropped across the board. Some utilities, a traditional safe haven, even saw their stock prices cut in half. In April, the market was much more about choosing winners and losers, with the chosen winners bouncing back hard.
- Green shoots: After a March of news that made me want to tear what little hair I have left out of my head, we started getting bits and pieces of good news in April. Field hospitals built for COVID-19 patients were torn down before ever being used. States and countries began tentative steps toward loosening “stay at home” orders. Gilead’s remdesivir showed signs of promise as a COVID-19 treatment in multiple studies. Added up, these were viewed as signs that, while the economic pain will be bad, it won’t be the doomsday scenario that was envisioned in March.
Going forward, I expect a similar, though hopefully less volatile, pattern. The market is going to be strongly driven by news which will make for a bumpy ride. There will be good news days, there will be bad news days. There will be up days, there will be down days. Through it all, I continue to believe that staying invested is the best solution for long-term wealth accumulation.