The first quarter of 2020 was a difficult time for financial markets and the world more broadly. In addition to the medical toll, the sweeping pandemic known as the novel coronavirus, or COVID-19, and the shutdown it created shuttered small businesses, disrupted global supply chains, stunted demand for goods, and caused unemployment to spike. For the stock market, the result was a decline of 19.6% as measured by the S&P 500 Index. While the market did rally and rebound sharply in the quarter’s final two weeks, the first three months of 2020 still ended as the worst on record since 1987. Meanwhile, the CBOE Volatility Index, a common measure of market volatility informally known as the VIX, tripled before calming during the late-quarter rally. While no area of the stock market was immune from this broader selloff, healthcare, technology, and the most defensive sectors like utilities and consumer staples held up relatively better. On the other hand, the energy sector was by far the worst hit, as a March falling out between major oil producers Saudi Arabia and Russia sent oil prices plunging as low as $20 per barrel. Frustrated by Russia’s unwillingness to agree to production cuts, the Saudis vowed to price the Russians out of the market, leading oil markets to post their largest one-day decline since the Gulf War.
In the bond market, yields moved notably lower across the board, with the 10-year treasury falling by over 1.1% to finish the quarter at 0.70%. In response to the worsening pandemic, the Federal Reserve slashed interest rates to zero in mid-March. The move, which was announced unexpectedly on a Sunday rather than during a regularly scheduled policy meeting, was a notable show of urgency and just one of the stimulative measures undertaken by the central bank. Additionally, many of the concerns that had been keeping yields range-bound heading into the quarter, including persistently low inflation and an anemic global interest rate environment, were exacerbated by the coronavirus shutdown and ensuing flight to safety by investors. Even hopes of a multi-trillion-dollar stimulus package, which should theoretically be inflationary, were not enough to stem the fall.
Outlook: The novel coronavirus has upended our society in a way that no one could have expected a year ago. With the rate of infection still high in most places, it is not unreasonable to assume that quarantine measures could remain in place for some time. That being said, remember that the market is forward-looking, so it has already priced in a lot of expected bad news in recent months. As a result, when economic data inevitably starts to come out that millions of Americans are unemployed and domestic GDP is down drastically from prior-year levels, the market may hold up better than one might imagine. For example, on a day where devastating data came out that 6.6 million Americans had applied for unemployment benefits, the market actually gained 2%. This does not help those that lose their jobs or the small businesses that are forced to close their doors, but it should help to frame our expectations for how the stock market may react to those developments. In fact, the market is already rallying back from its lows, gaining over 15.5% from Monday, March 23 to March 31st. Since then, the market has moved another 10% higher and is now trading back around August 2019 levels.
Still, we at Condor do not presume to know when the outbreak will be contained and when life will return to some semblance of normalcy. There is no guarantee that the past few weeks’ market move higher is permanent, and there may be further setbacks before we see stocks return to pre-virus levels. One thing we do know, however, is that the federal government is making every effort to flood the economy with stimulus measures. The $2 trillion stimulus bill was passed with rare bipartisan support, highlighting the seriousness of Congress’s response. While the bill will not be a panacea and there are businesses that will not survive this quarantine, the legislation does appear to make a widespread effort to support companies of all sizes, with the Paycheck Protection Program coming to the aid of small businesses and targeted bailouts buttressing larger, publicly traded industries. Additionally, the Federal Reserve is using the full extent of its powers to maintain order and liquidity in domestic capital markets. The Fed slashed interest rates to zero, upped the amount of government- and mortgage-backed debt on its balance sheet, and even extended its bond-buying program all the way out to high-yield corporate bonds, all moves that indicate the robust path the Fed is taking in its efforts to prop up the economy and support public debt markets. Given the large rally late in the quarter, it is clear that investors believe the effects of these stimulus measures to be significant.
The sharp market moves in response to the coronavirus in the first quarter represent a painful but important reminder about the nature of market volatility. Throughout 2018 and 2019, there were bullish pundits emphasizing the strong domestic economy and corporate earnings growth and bearish pundits talking about an imminent recession due to the bull market being too old, the yield curve inverting, or various other reasons. Understandably, not one was touting the risks of a global pandemic that did not even exist until six months ago. This is not a criticism of market watchers, but a reminder that the biggest risks to the market are often unforeseen and almost always temporary. The only way to prepare for this is to set a suitable allocation of both stocks and bonds and to stick to it through thick and thin. This means both maintaining your bond allocation and not getting too greedy as markets rise as well as gritting your teeth and staying invested in the stock market when things get rough. Markets will eventually recover, and you will be glad you did not sell out at the lows and miss the rebound. As always, we at Condor Capital thank you for entrusting us with your hard-earned assets and we will continue to work our hardest for you. We wish you and your families health and safety as we navigate through this difficult period.