1st Quarter 2020 Market Commentary: COVID-19 and the Inward Turn Towards Self-Sufficiency

Data Source: Bloomberg

To read full commentary, click here.

March 2020 Highlights:

  • Global stocks posted negative returns (MSCI All-Country World Index or ACWI down 13.5%) following negative returns in February.  Japan and the U.S. (-7.1% and -12.4%, respectively) led major regions while Asia ex Japan, Europe, and Emerging Markets (-14.0%, -14.4%, and -15.4%, respectively) bore the brunt of the global sell-off.     
  • As of the time of this writing, the number of confirmed global cases has exceeded 850,000 with over 42,000 confirmed deaths.  Europe and the United States comprise the largest number of active cases.
  • Latest medical consensus expects a downward inflection in daily new cases with the peak in active cases to occur sometime in late April/early May, although there are lingering concerns of a second wave flareup at the start of the next flu season starting in the Fall. 
  • Investors have reacted to the coronavirus pandemic by selling risky assets, especially pro-cyclical asset classes (energy, commodities, emerging markets, and small caps).  Commodity markets were especially hit hard in March as worldwide government quarantines and shelter-in-place orders will likely result in a significant decline in global energy demand. 
  • March’s near-unprecedented level of market volatility was met with unprecedented emergency measures adopted by global central banks and world governments.  Several global central banks drastically cut interest rates and several expanded their balance sheets (quantitative easing) to support local debt markets.
  • On the heels of the emergency lending measures launched by the Fed, the U.S. government (in a rare display of bi-partisan partnering), passed several fiscal stimulus spending programs.  The first two programs focused on immediate medical and food relief while the third program (CARES Act) amounted to an estimated $2 trillion to provide broader economic relief in the form of expanded unemployment insurance, direct household aid, corporate and U.S. small business lending support, and state/local municipal aid. 
  • Within the U.S. markets, U.S. small caps underperformed large caps and value underperformed growth by sizeable margins, widening the year-to-date relative performance gap.  For the month, S&P Small Cap returned -12.4% vs. -22.4% for the S&P 500 while S&P Pure Value returned -15.6% vs. -28.7% for Pure Growth. 
  • Small caps have underperformed as investors fear that smaller companies face greater business pressures in a global economy largely in lockdown.  Over half of the stocks in the Russell 2000 Index trade at less than book value, surpassing the level reached during the 2008 Global Financial Crisis (“GFC”).
  • Among sectors, coronavirus sectors (staples, healthcare, utilities) and technology/communication services far outperformed cyclicals and financials; energy sector felt the brunt of the selling as oil prices dropped to the low $20/barrel.
  • Among risk-based factors, Momentum, High Quality and Minimum Volatility outperformed Value and High Dividend.  Momentum is capturing the high growth and quality segments of the market both of which have outperformed over the past year.  Value largely comprises the underperforming financials and cyclicals. 
  • Fixed income sectors experienced significant intramonth volatility, but investment grade performance recovered following the Fed’s emergency lending measures.  The U.S. Bloomberg/Barclays Aggregate Index returned -0.6% for the month, outperforming other major fixed income segments.  High yield and emerging market debt suffered with the sell-off in risk assets although they recovered a chunk of their intramonth losses with the month-end risk asset rally.
  • Commodities were weighed down by the drop in oil prices; REITs did not benefit from the interest rate decline as the sector suffered from tightening financial conditions. 
  • Following the initial recovery expected late 2nd half of this year, a broader debate will emerge on assessing the coronavirus’ long-lasting damage to the global economy.  There will likely be permanent damage and aftershocks, similar to the 2008 GFC, as the world comes to grips with the aftermath of “social distancing.”
  • Investors, like many households, should hunker down as we work through the worst of the virus.  Risk assets may continue to remain under pressure given daily headlines, but their pricing is also incorporating much of the economic downside caused by the virus disruptions. 

1st Quarter 2020 Highlights:

  • Global stocks posted negative returns (MSCI All-Country World Index or ACWI down 21.4%) for the quarter.  Japan and the U.S. (-16.8% and -19.6%, respectively) led major regions while Asia ex Japan, Europe, and Emerging Markets (-20.7%, -23.6%, and -24.3%, respectively) lagged.     
  • Within the U.S. market, both large and small caps have suffered but large caps are outperforming small caps by a wide margin (-19.6% vs -32.6%, respectively).  U.S. growth is outperforming value (-20.7% vs. -41.8%, respectively).
  • Within sectors, growth (technology, health care) and defensive sectors (staples, utilities) are outperforming financials and cyclicals.  Energy has suffered with the drop in oil prices. 
  • Across U.S. risk-based factors, Momentum, High Quality, and Minimum Volatility are outperforming High Dividend and Value.
  • Investment grade fixed income finished the quarter on a positive note despite the volatility experienced in March.  Bloomberg/Barclays U.S. Aggregate Bond Index is up 3.1%, benefiting from the decline in long-term interest rates.  Risky fixed income sectors such as high yield and emerging market debt sold off with equities.
  • Commodities suffered in the first quarter with the S&P GSCI Commodities Index down 42.3%.  REITs were dragged down with the broader global equity sell-off, down 23.3% for the quarter.  S&P GSCI Precious Metals benefited from gold’s safe haven status, returning 2.1% for the quarter. 

To read full commentary, click here.

By: Benjamin Lavine