Quarterly Market Update – Q1 2020 By: Gabriel PotterMBA, AIFA® 2020.04.06

Key news stories

The first quarter of 2020 was nearly split into two halves.  Until the middle of February, the equity markets continued to soar unchallenged to new highs.  However, within a few weeks, the fastest bear market in history took effect as countries around the world scrambled to manage the public health crisis and the impact of the novel coronavirus outbreak.  After the steady 2.0% to 2.5% US GDP range we’ve become accustomed to, global growth will plummet as whole economies are shunted into a state of suspended animation.  Unemployment had been setting multi-decade lows, but it is now headlined by weekly job-losses in the millions as many businesses shutter operations for weeks or months.  The virus is exposing weaknesses in the credit markets, liquidity problems in the greater bond market, and the untested complacency of equity market valuations after years of bullish sentiment. 

Equities

The first quarter of 2020 was deeply and painfully negative for equity markets which had been riding high for eleven years without a bear market.  When one did come, it was sure to arrive quickly.  The broad US stock market (the S&P 500) fell roughly 20% for the quarter while international markets performed slightly worse, partially due to the US dollar’s safe haven status.  

INDEX

1Q 2020

YTD 2020

US Large Cap Growth - Russell 1000 Growth

-14.10

-14.10

US Large Cap Value - Russell 1000 Value

-26.73

-26.73

US Small Cap Growth - Russell 2000 Growth

-25.76

-25.76

US Small Cap Value - Russell 2000 Value

-35.66

-35.66

Developed International Markets - MSCI EAFE

-22.83

-22.83

Emerging Markets - MSCI EM

-23.60

-23.60

 

Bonds

The Federal Reserve has been working overtime during the first quarter to mitigate the impact of the economic slowdown.  We have criticized the Fed for being too accommodative over the past year, cutting rates despite all-time highs in the markets.  Now that an actual crisis has occurred, it has fewer credible responses and quickly moved into full emergency mode – slashing the key Federal Funds Rate to 0%.

The bond markets, which were codependently levered upon assets which were also failing, began forced selloffs.  As investors suffered margin calls, the imbalance between sellers created huge price volatility in key asset classes.  To respond, the Fed has acted as a backstop and liquidity guarantor, similar to how they responded during the 2008 financial panic.  The Federal Reserve (and other central banks) have the ability to provide short-term relief for a bond market, which was seizing up through late February and mid-March, with asset buyback programs (for treasuries, MBS and even corporates) and unlimited capacity to inject liquidity into the system.  Government and explicitly government backed paper (like agency mortgage backed securities) clearly outperform corporate credit markets across the quality spectrum.

INDEX

1Q 2020

YTD 2020

Barclays Capital US Aggregate Bond

3.15

3.15

Barclays Capital US Intermediate Credit

-2.35

-2.35

Barclays Capital US Government

8.08

8.08

Barclays Capital US Gov’t/Credit Long Duration

6.21

6.21

ICE B. of America/Merrill Lynch High Yield

-13.12

-13.12

FTSE World Government Bond Index (non USD)

-1.88

-1.88

Alternatives

The coronavirus lockdowns are severely limiting the demand for travel, locally and globally.  Therefore, energy prices fell to multiyear lows.  While some OPEC members (Saudi Arabia) wished to lower production (thus maintaining some price stability), others (Russia) felt the need to drill for oil at previous production levels.  Saudi Arabia called Russia’s bluff and began an internecine price war between OPEC members for control, thus cratering the price of oil well below the marginal cost for US shale oil producers (hydrofrackers) and competing OPEC members.

Real estate took a huge beating as businesses are forced to shutter operations and consumers are forced to stay at home.  Landlords may be prevented from rent collection due to the imposed lockdowns and potential moratoriums on rent enforcement (i.e. evictions).

INDEX

1Q 2020

YTD 2020

Real Estate - FTSE NAREIT All REITs TR

-25.42

-25.42

Commodities - Morningstar Long Only Commodity TR

-31.19

-31.19

Inflation - Barclays US Treasury TIPS

1.69

1.69

 

DISCLOSURES & DISCLAIMERS:

The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed.  Westminster Consulting, LLC reserves the right at any time and without notice to change, amend, or cease publishing the information.  It has been prepared solely for informative purposes.  It is made available on an "as is" basis.  Westminster Consulting, LLC does not make any warranty or representation regarding the information.  Without prior written permission from Westminster Consulting, LLC, it may not be reproduced, in whole or in part, in any form.  The information in this document is confidential and proprietary to Westminster Consulting, LLC including its business units and may be legally privileged. Any unauthorized review, printing, copying, use or distribution of this document by anyone else is prohibited and may be a criminal offense. Indices mentioned are unmanaged and cannot be invested into directly.  Past Performance does not guarantee future results.

 

 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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