Market Update

Executive Summary

2020 First Quarter Market Report
Sectors see 2008-2009 Lows
Most Likely a Recession in 2020
A Sliver of Gratitude

This is a partial update on the market performance over the last quarter. The investment committee is in the middle of finalizing next quarter’s tactical allocations for trades that we will place in the next 7–10 days. I will write our normal Quarterly Market Update once this is finalized and send it out via email before you receive your Quarterly Performance Reports.

You may not feel like being congratulated, but congratulations are in order. You have managed to make it through the worst first quarter on record in the U.S. investment markets. To put it mildly, the decade is not starting off well.

You also endured the fastest, longest, hardest roller coaster ride in market history, as measured by the CBOE Volatility Index (VIX). Basically, that means that one day the markets were down at record or near-record levels, and as most thought the bear market would continue, we experienced near-record one-day gains.

The previous record for instability in the stock market was an eight-day stretch in November of 2008, when the markets seemed to be gyrating up and down uncontrollably after traders realized the full implications of the collapse of Lehman Brothers. At the end of this recent first quarter, the VIX Index presented us with a record 10-day run with the Index above 60. (The long-term average for market volatility, as measured by the VIX Index, is 20.)

Just about every investment saw declines in 2020’s disastrous first quarter. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—fell 20.70% since January 1. The comparable Russell 3000 Index is down 20.90% so far this year.

Looking at large cap stocks, the Wilshire U.S. Large-Cap Index lost 19.88% in the first quarter. The Russell 1000 Large-Cap Index finished the quarter with a similar 20.22% loss, while the widely quoted S&P 500 Index of large company stocks is down 20.00% so far this year, with 12.52% of that drop coming in the month of March.

Meanwhile, the Russell Midcap Index suffered a 25.66% decline in the first three months of 2020.

As measured by the Wilshire U.S. Small-Cap Index, investors in smaller companies were hit with a 31.40% decline in the first quarter. The comparable Russell 2000 Small-Cap Index is down 30.61% in the first three months of the year. The technology-heavy Nasdaq Composite Index is down 13.10% for the year.

International investors are basically in the same boat. The broad-based EAFE Index of companies in developed foreign economies has lost 23.43% in the first quarter. In aggregate, European stocks are down 24.81% so far this year, while EAFE’s Far East Index lost 18.15%. Emerging market stocks of less developed countries, as represented by the EAFE EM Index, fell 23.87% in dollar terms in the first quarter.

Looking over the other investment categories, real estate—as measured by the Wilshire U.S. REIT Index—posted a 25.63% decline during the year’s first quarter. The S&P GSCI Index, which measures commodities returns, fell 42.34% in the first quarter, largely due to a 37.67% drop in oil and a 17.11% drop in gold investments.

In the bond markets, the inversion in the yield curve has corrected itself, though rates are at historic lows. Coupon rates on 10-year Treasury bonds have dropped to 1.50%, while 3-month, 6-month, and 12-month bonds are now sporting coupon rates of 0%. Five-year municipal bonds are yielding, on average, 1.17% a year, while 30-year municipal bonds are yielding 2.08% on average.

You don’t have to ask why Wall Street traders are abandoning stocks in near panic mode. The coronavirus pandemic, social distancing, and the closure of offices, malls, theaters, and anywhere else where people once gathered to work has raised uncertainty about the extent of business disruption in the U.S. and world economies. Economists at the St. Louis District of the Federal Reserve Board are now predicting that the short-term unemployment rate will reach 32%, which is higher than the 24.9% rate at the worst point of the Great Depression of the 1930s. A record-shattering 3.3 million people applied for unemployment benefits in a single week at the end of the quarter. With so much of our economy shut down until further notice, it is hard to imagine that we will avoid a recession in the first half of 2020.

All is not lost, of course. There is every reason to believe that the U.S. will be back at or near the record-low unemployment when people are once again allowed to return to work and leave their homes to shop. To stop the bleeding, America’s central bank is pouring more than $3 trillion worth of loans and asset purchases into the U.S. financial system—an unprecedented commitment. The newly-passed CARES aid package is worth an aggregate $2.2 trillion more, $377 billion of which will be used for loans to businesses that are having trouble meeting their payrolls while they sit on the economic sidelines; $560 billion for individuals and families; $500 billion in outright grants to large corporations; and $340 billion set aside for state and local governments.

There are times when we all face challenges more important than the ups and downs of the markets, and this time certainly qualifies. The pandemic has become very real to my family as my best friend lost his father to COVID-19 and underlying conditions over the weekend. This has been a period of great soul searching and grief for so many, including myself. In times like these, I take comfort in what I’ve been taught: “Ask and it will be given to you; seek and you will find; knock and the door will be opened to you”. My sincere hope is that you find what you are seeking as well. Staying safe, staying well, staying informed, and keeping our loved ones out of harm’s way takes priority in this global pandemic.

Just like in 2007–2009, we must believe in the resilience of the U.S. economy and that our capital markets will weather the storm; we must value persistence while many investors are making decisions out of panic. Wall Street’s traders seem to be caught like deer in the headlights, but seldom has a strategy based on fear turned out well in the end.

We all have much to be grateful for. We look forward to a time after this pandemic has swept across the world when we have even more to be grateful for, including the safety of our loved ones, a return of value to our portfolios, and our country’s economic well-being.

In Loving Memory of CLIFF UPRIGHT – One of Baseball’s Greatest Dads.

Best, and stay safe and healthy!

JJ Williams

Sources:

Russell Index data: http://www.ftse.com/products/indices/russell-us

S&P Index data: http://www.standardandpoors.com/indices/sp-500/en/us/?IndexId=spusa-500-usduf–p-us-l–

Nasdaq Index data: http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities Index data: https://us.spindices.com/indices/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

General: https://www.marketwatch.com/story/why-the-vix-gauge-of-stock-market-volatility-is-still-so-stubbornly-high-2020-03-30