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Quarterly Vantage Point: First Quarter 2020 Recap

April 06, 2020
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In stark contrast to a strong 2019 in which the S&P 500 surged over 31%, the U.S. benchmark equity index plunged over 23% from its February 19 record high to cap its worst quarterly performance since the financial crisis. The historic 19.60% quarterly drop was caused by growing evidence that the global COVID-19 pandemic and associated business closures and labor furloughs has almost certainly sparked a recession. In just sixteen trading days from the market’s record high, the viral contagion abruptly ended the longest bull market in history on March 12, lasting 11 years and three days. It was the fastest bear market slide on record.

Swift unprecedented action from the White House, Congress, and the Federal Reserve has gone a long way toward blunting the harshest economic effects that are yet to be fully known. The U.S. central bank slashed interest rates to nearly zero, renewed asset purchases, and launched new lending facilities while pumping hundreds of billions into credit markets to insure adequate liquidity. Meanwhile, President Trump signed into law a massive $2 trillion fiscal rescue package to protect American businesses and households. Even amid signs of calming during the last week of the quarter, another massive Congressional stimulus package is already in the works should the coronavirus spread continue to worsen and deepen economic damage.

While investors closely watch for a slowing trend in daily new infections, trading volatility has been overwhelming. The Cboe VIX Volatility “fear factor” Index tripled the average level during the entire past decade, reaching a quarterly peak on March 16.

The small cap-focused Russell 2000 Index fell nearly 31% in the first quarter, its largest loss on record dating back to 1979. Russell Mid Cap stocks fared only marginally better, down just over 27% last quarter. The Russell 1000 Growth Index (-14.10%) widely outperformed its Value (-26.73%) counterpart during the first quarter.

As the preceding sector performance table shows, all 11 sector groups posted monthly and quarterly losses. Unsurprisingly, March and first quarter losses were least in technology and defensive-oriented sectors including healthcare and consumer staples. Energy companies skidded the most, suffering from a 66.4% drop in U.S. crude oil prices, its worst quarter on record. World oil prices sank to 18-year lows amid a simultaneous demand collapse and supply glut stemming from a Saudi/Russian price war likely aimed at curtailing U.S. shale oil production. The number of active U.S. oil drilling rigs in the key Permian basin fell to the lowest level in over five years.

Internationally, foreign equity markets posted slightly deeper quarterly losses relative to the U.S. The MSCI EAFE, a measure of developed markets outside the U.S. and Canada, fell 22.83% during the quarter, while emerging markets lost 23.60%. Globally, the MSCI All-Country World Index fell 21.37% last quarter, while world stocks excluding U.S. performance tumbled 23.36%.

U.S. Treasurys, as measured by the Bloomberg Barclays U.S. Government Bond Index, was among the few global safe havens, attracting worldwide buyers that drove returns to 8.08% for the first quarter. Longterm U.S. government bonds surged 20.63%. The yield on benchmark 10-year Treasury notes ended March at just 0.67%, down from where it began the year at 1.92%.

 In other fixed-income assets, investment-grade bonds of all types (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index) underperformed relative to purely safe-haven government debt, up just 3.15% in the first quarter. Municipal bonds lagged other investment-grade bonds last quarter, albeit off just 0.63%. Reflecting greater credit risk for possible rating downgrades and payment defaults, the Bloomberg Barclays U.S. Corporate High Yield Index, the leading gauge of non-investment grade corporate bonds, posted steep quarterly losses, down 12.68% for its worst performance since 2008.

 

This report is created by Cetera Investment Management LLC

 

 

 

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