MARKET BRIEFS: Q1 RECAP AND Q2 OUTLOOK

High-yield bonds, definitely not a “free lunch”   |   Market Review Q1 2020  |   The Eye of the Storm

Background

It’s been another dizzying week in the market with US stocks enjoying a healthy bounce even in the face of record jobless claims. The longer the pandemic goes on, the more we learn and the more we realize all of the things that no one knows, particularly regarding the possibility of additional layoffs, additional stimulus, and new developments in how we are managing the virus. Although it is hard to know whether the market rose last week because of the coronavirus relief package passed by Congress, or whether investors are assuming the recession will be deep but brief, it is important to remember that the market only regained about a third of its earlier losses so the market’s jump from its low may simply be the bounce that occurs in the middle of a bear market until investors have a chance to process new information before ultimately capitulating and driving the market still lower.

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• Equity markets took their fastest tumble in history from a record high. In 18 trading days, the US equity markets fell more than 30%. For the full quarter, US equity markets returned -19.6% marking its worst start to the year in history.
• Surprisingly, it wasn’t a defensive sector that held up best in the downturn. Technology was the best performing sector, returning -11.9% helped by Microsoft that saw a positive 1 basis point return for the quarter. Consumer staples and utilities, the bond proxy sectors, outperformed the broad market while energy saw the weakest returns at -50.5%, hurting from the over 50% drop in oil prices for the quarter.
• International markets fell along with the US markets with the developed markets returning -22.7% and the emerging markets returning -23.6%. Only two countries, New Zealand and Denmark, fell by less than 10% over the quarter and China only fell by 10.2%, which was the main reason emerging markets outperformed developed markets in local-currency terms. Once again, the strengthening dollar weakened returns for US investors.

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The story

The first quarter of 2020 was one for the record books. Governments around the world engineered a massive contraction in the global economy while working to slow the spread of the coronavirus. Equity markets did not yet understand the full impact of the measures, but knew enough to drive the fastest, most volatile bear market in history. After reaching an all-time high on February 19, the S&P 500 Index fell by 34% over the subsequent 23 trading days. In response to massive monetary and fiscal stimulus, the S&P 500 then experienced the sharpest three-day rally since 1933 ultimately finishing the quarter 16% above the recent low. A number of well-known equity strategists have opined that the bear market is over and unlikely to revisit the lows of March.

The reality

The global economy is in the early stages of an unprecedented contraction. But the contraction has happened so quickly that it is not fully apparent in official economic data. In the first clear sign, a (then) record 3.3 million workers applied for initial unemployment benefits during the week ending March 20. The following week (ending March 28) set another record, 6.6 million initial claims. Estimates for a peak unemployment rate range from mid-teens to twenty percent; that range is 40-85% higher than the highest reading since 1948 (10.8% in November 1982).

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Join us next week for our Premier Advisor Series webinar:

Leading Strategists on the Markets and Outlook Ahead - Register

Tuesday, April 7 | 12:30pm PT / 3:30pm ET

Speakers:

Emily Tillman, VP Equity Investment Director, Capital Group

Michael Arone, Chief Investment Strategist, State Street Global Advisors

Kurt Reiman, Senior Strategist, BlackRock

Jason Thomas, CEO Chief Investment Officer, Savos