First Quarter 2020 Investment Commentary

U.S. Stocks Post Their Worst Quarter Since 2008

The first quarter was marked by the declaration of a pandemic due to COVID-19, an event that most individuals have not experienced in their lifetimes. U.S. stock markets peaked in the third week of February then experienced the fastest decline on record, with the broad U.S. market ending the quarter down 21% year-to-date as measured by the Russell 3000 Index. Smaller company stocks suffered more than their larger counterparts as did value-oriented stocks compared to growth stocks. International stocks were down slightly more than U.S. stocks, at 23% including developed and emerging markets. Volatility during March was exceptional. There have been 49 days over the past 10 years when the U.S. equity market (as measured by the S&P 500 Index) has moved up or down by more than 3%. 19 of those 49 occurred in the last three months!

Cash and Core Fixed Income Held Up Well

Core Fixed Income was the bright spot for the quarter and the only positive asset class other than cash. Within the investment-grade or high-quality bond universe, corporate bonds came under pressure approximately mid-way through March, leading to mixed performance for certain fund managers. The Federal Reserve took action as uncertainty regarding the economy grew and liquidity issues developed in bond markets, calming the environment toward quarter-end. The Fed actions included dropping the Fed Funds Rate essentially to zero and implementing several funding mechanisms to settle markets the likes of which we have not seen since the 2008-2009 period.

Economists Expect a Recession This Year

In the middle of a crisis it is often hard to see how it will come to an end, especially as negative headlines relentlessly continue. It is easy to lose sight of the resilience of markets and economies. Since 1928, there have been 14 recessions and 19 bear markets*. Markets have never failed to recover, and each time ultimately reach and surpass their prior peak. At this time markets are pricing in a serious economic decline in the U.S. and many other countries. There is no consensus among economists as to how quickly we may see a recovery as it is simply too soon to tell.

Equity Markets Will Appreciate Ahead of Positive Economic Statistics

It is important to remember that markets are forward looking which means that a certain amount of bad economic news is already reflected in market prices. This is why markets can rise when negative economic data is published. Markets will likely turn upward before we have the data to tell us that the worst is over. When that will occur is impossible to know. In the meantime, we are managing portfolios with a watchful eye and recognition that we are stewards of your financial well-being. In designing your portfolio, we planned for a potential downturn, built in a reserve and considered how to protect you from an event such as this. As a result, staying the course will likely be the best practice and will afford you the opportunity to capture future returns. If you experience a change in circumstances or have questions or concerns, please contact your advisor.

*Source- JPMorgan.