The first quarter of 2020 proved to be one of the most volatile on record. By the end of the quarter, market performance reached lows not seen since the Global Financial Crisis. As we are all aware, this severe decline was a result of the pandemic caused by COVID-19.
When looking at the returns for the first quarter, it makes sense to look at it in four stages:
- Continuation of the bull market: From the beginning of the year through the February 19 market peak, stocks continued their slow, steady climb. Volatility was normal and the S&P 500 was up 5.40%.
- Flight to safety: In the beginning, the market started reacting to the coronavirus threat in a somewhat orderly manner. Investors flocked to higher-quality securities, such as consumer staples in equities and U.S. Treasuries in bonds. From February 19 through March 6, the S&P 500 lost -11.71%.
- Panic selling: This is when fear took over. Suddenly, most of us were working from home, kids no longer went to school and most non-essential activities were shut down. Cash was king as investors sold indiscriminately. From March 6 through March 23 the S&P 500 lost -25.93%.
- Market reacts to stimulus: Next came government intervention. First, the Fed acted. They not only lowered interest rates to zero, but they provided liquidity in order to keep financial markets operating efficiently. Our elected officials stepped in next with a $2.2 trillion stimulus bill. The bill focused on providing individuals and small businesses with liquidity to pay their bills while the economy is shut down. Investors must have viewed it as a step in the right direction because from March 23 through the end of the quarter, the S&P 500 was up 12.18%.
In the end, it ranks as one of the worst quarters on record. The S&P 500 was down -19.60% when all was said and done. Unfortunately, as we experienced in 2008-09, when fear takes over, everything goes down together. For the quarter, small-cap stocks (S&P 600) lost -32.64%, international stocks (EAFE) lost -23.43%, REITs (FTSE Nariet Index) lost -25.42%, and oil (WTI crude) lost -66.74%.
The only diversification that worked at all was diversifying into bonds and bond alternatives. The U.S. bond market, as measured by the Bloomberg Barclays U.S. Aggregate Index (Agg), returned 3.15% for the quarter. But bonds also had a wild ride in the first quarter.
Let’s look at the same four stages as it pertained to bonds:
- Continuation of the bull market: During this stage, the bond market did well. The Fed kept interest rates stable at their meeting in late January. They offered a guardedly upbeat assessment of the US economy but acknowledged they were keeping a close eye on global developments. The Agg was up 1.91% during this stage.
- Flight to safety: The Agg is made up of Treasuries and investment-grade bonds. It therefore benefited from the flight to safety. During this stage, the Fed cut rates from 1.75% to 1.25%, another positive for bonds. The Agg returned 3.58% during this stage.
- Panic selling: During the panic selling stage, even the safest of bonds were sold. Investors seemed to lose faith in the ability of the markets to function. The Fed stepped in and provided liquidity and took the benchmark fed funds rate down to 0%. At this point, it did not have much impact. Nervous investors thought the sky was falling. The Agg was down -3.43% during this stage.
- Market reacts to stimulus:After time had passed, investors realized the Fed was going to do anything and everything to get us through this crisis. Fed Chair Powell emphasized this point in a rare appearance on a morning news outlet. Congress added fiscal stimulus to help businesses pay their bills until the economy is functioning again. With the risk of default lowered, bonds rallied and the Agg returned 3.13% during this stage.
The bonds discussed above are bonds of the highest quality. Bonds of lesser credit quality experienced even more volatility and did not provide the same diversification benefits. Most of the damage was done during the panic selling stage, when even investment-grade corporate bonds and high-quality municipal bonds fell by more than 10%. These non-government bonds did rally after the stimulus was announced.
We are in unprecedented times. In Bill Few Associates’ 30-plus years of existence, the only other time we have seen this level of downside volatility was during the Global Financial Crisis. From a stock market high in 2007 through the eventual bottom in early March 2009, the S&P 500 was down 57.7%. Our current fall in the markets has been faster, but not yet as painful. In navigating through that crisis, we learned that patience was a virtue. Making large-scale sales or buys too early, when there are so many uncertainties, does not seem prudent. We are still seeing multiple percent swings on a daily basis. Although we are confident there are opportunities, the markets are struggling with how to value individual securities. Once the markets settle down, we will be prepared to reallocate your account. This could be in weeks, or it could be in months. We continue to follow the indicators and study how the markets are behaving. We look forward to the day when the U.S. economy and markets are functioning as we are accustomed.
All return data from Morningstar and The Wall Street Journal
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