Financial markets celebrated good news during the month of April with a “Spring” forward that surprised most investors, after the poor results posted for this year’s first quarter.
Good news includes data indicating success in “flattening of the curve.” In investment jargon, this expression generally refers to actions in the bond market that reflect a narrowing in the yields offered between different maturity dates. However, like many things, COVID-19 has impacted traditional definitions.
With improving testing capabilities and social distancing, investors are hopeful that economic healing is underway. Health care systems appear to have adjusted their capacities and announcements of approval in many states for non-essential procedures provide hope that the downturn can be reversed. Perhaps it will not take as long to return to a “Goldilocks” economy – one that is not too hot, yet not too cold.
During the next few months, economic data will continue to be disappointing and reflect the impact of massive employee layoffs and business shutdowns. However, that is history. Investors should focus instead on the positive impact of the gradual reopening of economies. As consumer confidence improves, so will the outlook for continued earnings growth.
Trying to estimate when the earnings of companies could climb back to the levels reached at the end of 2019 is impossible. However, there is a great probability that this will be achieved. Using this conservative assumption, the chart below indicates the rates of return investors could earn on the way back to valuations that were in place at the end of last year.
If the economy recovers in two years, stocks would compound at a rate of 10% per year. This compares favorably versus the slight return of 0.2% an investor would earn currently from a two-year U.S. Treasury bond. If the climb back takes five years, the return drops to 5% annualized versus the slight yield of 0.4% offered by a five-year U.S. Treasury bond.
*Source: JP Morgan
Clients will be receiving statements soon from their custodians for April. We suggest that you take time to review and note the significant rebound for your portfolio – in just one month – as a result of heeding our advice to “stay the course.”