The year seemed to start normally but dominated by news about the U.S. and China trade war, tariffs, and impeachment. But early news of the coronavirus pandemic foreshadowed a very different year to say the least. By March, the COVID-19 pandemic spread around the world negatively impacting the global economy and affecting people’s lives as infections and deaths increased. Many of us watched or read the news as the virus spread into Europe and then the U.S.

The virus’ impact was devastating on economies to put it mildly. In the U.S., GDP declined by a record -31.4% in the second quarter of 2020. Similar declines were experienced around the world.

Source: U.S. Bureau of Economic Analysis

Unemployment in the U.S. spiked to almost 15%, which was the highest on record going back to 1948. The U.S. and much of the world entered a recession fairly rapidly. This was unlike the last recession during the sub-prime mortgage crisis, which evolved slowly like a train wreck in slow motion.

Source: St. Louis Fed

Stock Market Drops Like A Rock

This year the market has been unlike any other since I started investing. The drop in stock prices in late-March was unprecedented. In a few short weeks the major markets were down as much as -41% in the case of the Russell 2000, -35% in the case of the Dow Jones 30, and -30% for the S&P 500. The tech heavy Nasdaq-100 did better but was still down almost -20%. I used Stock Rover to make the comparisons. It just goes to show how random the stock market can be. The market is complex and constantly changing. In any case, the market was clearly expecting companies to perform poorly in aggregate due to the pandemic.

Source: StockRover*

The Fed Rides to the Rescue

The drop was gut wrenching. But those who sold in fear missed the snap back and the impressive gains since the lows. Much of this was due to extraordinary action by the Fed and Chairman Powell as they pumped liquidity into the banking system and the U.S. economy. The Fed lowered the Federal funds rate to a range of 0% to 0.25%. The Fed also resumed purchasing U.S. Treasuries and mortgage-backed securities, revived the Primary Dealer Credit Facility, backstopped money market mutual funds, expanded repurchase operations, and started to directly lend to banks and large corporations, as well as other moves. There was some discussion in the financial news about the Fed running out of firepower to combat economic contraction and deflation. But surely the COVID-19 pandemic shows that the Fed can be very creative and move quickly when it needs to.