1Q20 Market Overview
The investment success of 2019 quickly faded as Covid-19 spread across the globe. Fear and equity market deterioration peaked on March 23. The Dow bottomed at 18,591 after losing 37% of its value in just over five weeks. By the end of the quarter, the Dow already recouped 18% of the loss and closed at 21,917.
Once the attention moves away from the daily chaos of the pandemic and transitions to widespread testing, companies will have a better handle of their projected quarterly results and long-term prospects. Until then, anticipate continued volatility in the months ahead since no one really knows the depth and length of this temporary economic soft patch.
Regardless of the market direction, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level.
Tax Legislation Update: With the passage of the new Cares Act to deal with the virus disruption, mandatory retirement distributions are NOT required in 2020. This waiver will make it more appealing to consider converting a portion of your regular IRA into a Roth IRA in 2020 to take advantage of the pull back in equities.
U.S. Equity Markets
U.S. equity markets experienced a painful sell-off that led to a Russell 3000 quarterly loss of 20.9%.The coronavirus was first detected in the U.S. in mid-January and it quickly spread to over 640,000 people in all 50 states by mid-April. As New York was under attack with the virus, Americans started realizing the seriousness of the threat. They adjusted their daily routines as governors across the country determined how they would prepare and deal with the crisis. As each week went by, a coordinated effort by the U.S. government helped provide liquidity to capital markets, medical supplies to hot spots, daily communication to ease fear about the virus and job security. These much-needed action items ultimately started the healing process to help protect lives and our $22 trillion dollar economy. With 70% of our economy relying on consumer consumption, the shutdown has been a significant adjustment to American consumers and businesses. The government stimulus responses instilled confidence that it would do whatever was required to avoid a permanent deterioration of jobs and companies. Once the virus is contained, non-essential business will gradually spring back into action and we can work towards a new normal.
International Equity Markets
International developed equity markets closed out the quarter with a 22.8% loss for the MSCI EAFE. When reviewing international returns, there seemed to be a high correlation of market returns to Covid-19 cases which carried more emotional weight than underlying economic conditions. For instance, Eurozone equities were down 22.6% which was in line with the EAFE and U.S. markets both hard hit with cases, death and fear. One of the largest detractors from the Eurozone was Italy which lost nearly 30% of its stock market value in the first quarter. Italy is the home to 60 million and witnessed the most horror with 77,635 Covid-19 cases and 12,428 deaths by quarter end. Although Japan is the world’s tenth-most populous country with 127 million, they only experienced 2,178 Covid-19 cases and 57 deaths by the end of March and their market experienced less destruction with a 16.6% loss. The MSCI emerging markets loss of 23.6% was slightly worse than the developed markets. China’s was the outlier with a 10.2% loss to help overcome Brazil’s damaging 50.2% loss under the weight of U.S. dollar strength. Both developed and undeveloped international markets look more attractive from a valuation perspective compared to U.S. markets; however, it will continue to take coordinated government stimulus to overcome the coronavirus virus toll and jump start stagnant international economic growth.
Fixed Income Markets
Safety-minded investors experienced mixed results as the closely watched Barclays Aggregate rose 3.1% during the quarter. As Covid-19 spread, the Fed took quick and bold action by cutting interest rates to support and help stabilize the fear and anxiety that disrupted U.S. economic growth. The bond markets strong gains through February disappeared in a few short days before regaining their footing when the Fed came to the rescue to relieve market stress and allowed the markets to start functioning and flowing more efficiently. Factoring in the Feds accommodative posture, the 10-year Treasury sank from 1.92% on December 31 to 0.70% on March 31. Given the considerable yield drop and recession concerns, longer maturities were rewarded the most. The Barclays US Government Long posted a 20.6% quarter gain, Intermediate 5.2% gain and Short 2.7% gain. In the international fixed-income arena, the JPM Non-US Unhedged lost 1.2%. The Barclays Municipal finished the quarter with a loss of 0.6% after losing 3.6% in March as investors feared that state and local governments were going to feel the economic strain of less tax revenues for the foreseeable future.