Q1 2020: Unprecedented Markets & Responses
After hitting an all-time high on February 19th, the S&P 500 Index fell sharply through the end of the quarter. Heightened levels of trading took control during the last 6 weeks of the quarter and the Index experienced a -33% drawdown from the market high, ending the quarter with a -19.6% loss. The beginning of the decline was especially steep, as the market declined more than -10% in the first six trading days after the high.
Source: Morningstar Direct. Past performanceis not indicative of future results
Adding to the market volatility was a battle between Russia and Saudi Arabia over oil output (and thus prices). The glut of oil available and lack of demand due to lower economic production in countries such as China sent the energy sector on a downward spiral. For the quarter, the S&P 500 energy sector declined almost -51%, the worst of the 11 primary sectors. The remaining sectors fell between -32% (Financials) and -12% (Technology). Mid and small cap stocks followed suit with the S&P MidCap 400 Index and S&P SmallCap 600 Index declining -29.7% and -32.6%, respectively.
Fear over the potential impact of the virus and rising number of cases and fatalities across the globe roiled international equity markets as well. All developed and emerging market countries posted a loss for the quarter except United Arab Emirates, ranging from China’s mild -10.3% decline to Brazil’s -50% loss. Broadly, the MSCI EAFE and MSCI Emerging Markets indices declined -22.8% and -23.6%, respectively. The virus was identified in China in December 2019, and that market saw the start of a market drawdown and disruption in early February then the start of a modest recovery, putting it potentially on a trajectory 4-6 weeks ahead of the U.S.
Corporate bonds also declined during the quarter as investors demanded a higher yield as compensation for holding these assets during a potential corporate slowdown as U.S. consumption ground to a halt. Most states instituted some form of stay-at-home order and bars, restaurants, and other leisure activities were shuddered. As a result, yields on corporate bonds increased to levels not seen since the Financial Crisis of 2007-2008.
A Monumental Fiscal Response
The federal government opened its full playbook to combat the fiscal and economic effects of social distancing and other orders to slow the spread of the virus. As we previously mentioned, the current drawdown is being driven by concern about the ability of the consumer to spend. Personal consumption accounts for almost 70% of US GDP¹. The size and scope of the stimulus packages has been unprecedented. Direct payments to citizens, penalty-free access to retirement accounts, massive bond-buying programs to address market liquidity and loan programs for logistics, and small businesses have all been approved, totaling between $2 and $4 trillion. As a reference, the government’s rescue package during the Financial Crisis of 2007-2008, the Troubled Asset Relief Program or TARP, was $700 billion.
The government also enacted two emergency interest rate cuts to buffer the economic blow. That announcement combined with investors fleeing equity and credit risk led to a strong rally in U.S. Treasuries. During the quarter, 20-year Treasuries gained 21% and even shorter dated 7 to 10-year bonds rose 10%². Investors also sought haven in gold during the quarter, with the iShares Gold Trust (ticker: IAU) gaining 5.6%.
Remain Disciplined in Your Approach
The current market volatility appears to be a pause rather than a restructuring of the market and financial systems. As the virus runs its course economic activity will return. There may be pockets of the economy that experience a structural change, but overall investing principles and market dynamics will likely not look dramatically different. We believe the best course of action is to stay the course. Remain focused on your investment plan. Evaluate your risk tolerance. Keep to your portfolio rebalancing schedule.