This past quarter was both awful and one for the record books. The first global pandemic in over 100 years brought an end to the longest bull market in U.S. history with declines so sharp they triggered multiple exchange trading halts. The S&P 500 took just 16 days to enter a bear market, its quickest 20% fall ever. Market volatility was off the charts, with March’s 5% average daily move rivaling levels last seen in the Great Depression. Oil prices fell to multi-decade lows as an energy price war was launched amidst one of the largest demand shocks in history – and all this against the backdrop of full market valuations.
U.S. stocks finished down nearly 20% in Q1, making it their worst performance since 2008 (international and smaller companies fared worse). After a five-week plunge that sent the S&P down 35% from its mid-February highs due to indiscriminate selling, the market rallied late in Q1 as panic subsided, authorities put in stricter measures to slow the growth of the coronavirus, and governments launched a fiscal and monetary blitzkrieg to mitigate the economic fallout from disrupted businesses and the coming wave of unemployed workers.
It is extremely likely there will be a recession in the middle part of 2020 as companies have seen sharp drops in demand while supply chains are stressed due to border closures and stay-at-home orders. If there’s a silver lining, it is that bear markets typically end with recessions. Soon, it appears as though society will be able to better monitor and control the spread of the coronavirus, and governments can increasingly turn their attention to nurturing a full economic recovery. However, defaults and bankruptcies will likely pressure earnings for the remainder of this year. In the meantime, we have seen over $6 trillion in U.S. stimulus that hopefully can serve as a “bridge loan” to see us through the next lean month or two until some semblance of normality returns. Those companies that survive will be those that adapt best, and we wouldn’t be surprised to see the U.S. benefit in the long run from a return of manufacturing to our shores and greater use of remote-working technologies.
As we enter Q2, there appears to be a major improvement in risk appetite on a small improvement in the trajectory of growth in new coronavirus cases. Stocks are much cheaper now as are many corporate bonds, and the relative attractiveness of equities appears to have widened assuming the recession is a rather mild one. With more than 10 million jobless claims suggesting a rapid rise in unemployment, however, we remain somewhat cautious. We continue to believe investors are able to position for success in the coming years by adhering to an investment plan that aligns with their overarching goals and objectives, while taking advantage of future market turbulence through opportunistic rebalancing.
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