Q1 2020 Quarterly Market Review and Looking Ahead
Global Economies and Markets
The first quarter of 2020 has been challenging on many levels. With the spread of the coronavirus throughout the U.S., our daily vocabulary now includes phrases like “social distancing,” “flattening the curve,” and “self-quarantine.” As we continue to fight for the health of our nation, several areas of our economy have ground to a halt with restaurants and retail establishments closing, travel waning, and many workers temporarily losing their jobs.
These drastic economic changes are reflected in our capital markets, which have seen unprecedented losses during the quarter. There was virtually no place for investors to hide, as nearly every asset class saw negative returns solidly in the double-digit range. The S&P 500 Index, a barometer for large U.S. companies, posted a 20 percent loss for the quarter — its biggest quarterly decline since 2008. Mid- and small-size companies, as measured by the Russell indices, were down anywhere from -20 percent to -36 percent. International markets are also feeling the strain, posting returns of -23 percent as measured by the MSCI ACWI ex U.S. Index. Among the worst-hit sectors in the first quarter was energy, partly driven by the sharp fall in the price of oil to $20 per barrel, a decline of 66 percent from the beginning of the year.
Even bonds did not provide much respite as investors sold riskier areas of fixed income (such as high yield and global bonds) and piled into higher-quality holdings like U.S. Treasuries, or even cash. The yield on a 10-year US Treasury, which is a broad barometer for the fixed income market, closed the quarter at 0.67 percent but dipped as low as 0.54 percent in early March. Investors are getting paid less than 1 percent to buy a U.S. Treasury that matures in 10 years. This means investors aren’t concerned with earning yield at this point, but instead are more interested in finding “safer” areas of the markets.
There is no question that our economic growth going forward will be temporarily impaired by the current situation. In the months to come, we will see more data to quantify the ongoing effects on our economy. First-quarter GDP growth figures will most likely be affected, but because large parts of the economy shut down during March, the second quarter figures will most likely be down by larger margins. Given the technical definition of a recession is two consecutive quarters of economic decline as reflected by GDP, it is likely we will see a recession in the coming months.
On the bright side, we have seen unprecedented monetary and fiscal policies to alleviate the economic effects of the pandemic. The Federal Reserve (Fed) has taken several steps to insulate the U.S. economy from prolonged domestic stress and trouble overseas. This includes lowering the Fed Funds Rate, purchasing Treasuries in the open market, lowering reserve requirements for banks, as well as other measures. In addition, the government released an unprecedented $2.3 trillion of fiscal stimulus through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill includes a number of provisions to help both employers and families contend with unemployment and other economic fallout. However, the question remains as to how deep and prolonged the economic effects of this pandemic will be.
What Does This Mean For You?
Even in this time of stress, our message remains consistent: We will get through this period of uncertainty in the markets. This is a temporary setback, not a derailment of our financial future. We encourage investors to maintain a long-term perspective. We continue to apply a disciplined process that includes an asset allocation closely aligned with your financial goals.
This is the time when having an advisor like Domani Wealth, which is focused on your financial goals, can really make a difference in your long-term financial plan. We view the current situation as an opportunity to revisit your strategic portfolio allocation, take another look at your cash needs, make portfolio shifts to minimize tax liability, and review your long-term goals. If you have any questions about your portfolio or financial goals, please call our office for an appointment.
Data sources: Bloomberg, Wall Street Journal
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.