Quarterly Market Review: Q1 2020

Time Marches On

"There are decades where nothing happens; and there are weeks where decades happen."

― Vladimir Ilyich Lenin

Whether it be stock market losses, staggering pandemic unpreparedness, unparalleled increases in unemployment, and the near instant shuttering of businesses that took many years to build, March 2020 will go down for all of us as a period of weeks where decades happened.

Markets – simply a reflection and collection of businesses, managerial decisions and shifting consumer demands – have been struggling to assess and value the unknown scope, depth and longevity that the impact of COVID-19 will have, which has been reflected in the volatility of the past couple of months. We will get through this. Over the long term, patient and disciplined investors prevail and have been rewarded with higher stock prices and returns over time, and we fully expect that to continue.

To provide a bit of historical perspective, below is a graph of market declines and increases from 1926 to 2019, showing the length and depth of the declines and subsequent recoveries.

A History of Market Ups and Downs

S&P 500 Index total returns in USD, January 1926 - December 2019

Using a 10% threshold for downturns

Chart end date is 12/31/2019, the last trough to peak return of 31% represents the return through December 2019.

Bear markets are defined as downturns of 10% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Sudden downturns can be unsettling, but historically, as seen in the graph, U.S. equity returns following sharp declines have been positive, on average. Broad U.S. market index tracking data since 1926 shows that stocks have delivered positive returns over 1-year, 3-year, and 5-year periods following steep declines. Viewed in annualized terms across 5-year periods, returns after 10%, 20%, and 30% declines have been close to the historical annualized average over the entire period of 9.6%.

Source: Dimensional Fund Advisors

As I said before, on an academic level, COVID-19 is just another cause of market declines. Emotionally, it’s altogether different. All the data in the world and all the pretty charts will not change the current state of our reality. We can’t guarantee any particular outcome or time frame for a recovery and resumption of growth. We do know that properly managing what we can control – asset allocation, costs, and investor behavior – gives our clients the best probability of benefiting from positive, long-term market returns. As seen in the data above, staying invested and capturing the recovery is key.

Beyond historical data, I also want to speak to what’s happening now, at a national level, economically. The value of global fiscal stimulus programs now totals well over twice the level reached during the 2008 Financial Crisis. This time, the design of the programs has been aimed at saving businesses, job retention schemes, and loan loss guarantees for banks. Whether that is being achieved is up for debate. Beyond this, there has been very little productivity investment, such as infrastructure spending. Fiscal deficits have ballooned and debt levels around the world will soar. Small businesses are the backbone to this service-oriented economy and with demand far outstripping the initial $350 billion Paycheck Protection Program (PPP). Much uncertainty exists as to what the final tally of stimulus aid will be in the U.S.

Meanwhile, the investment landscaped continues to shift. The heavy hand of central banks are increasingly upending traditional market forces. The Fed announcement that it will purchase all manner of bonds, including municipal, mortgage, and speculative grade debt, in “unlimited” amounts, is one example. The recent drop in oil prices below $0 is an example of other market forces trying to cope with the sudden stoppage of economic activity. Nothing about this will be easy, but we will get through it.

Thankfully, individuals, small businesses and corporations are flexible, creative problem-solving entities. COVID-19 will be solved. Business rehabilitation will be solved. Hopefully, all of us will have learned something valuable from this time that we will carry forward with us.

For now, please take care of yourselves and your family, be thoughtful of neighbors in need, and stay well.

Economic Indicators at a Glance

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review.

Data source: Trading Economics. 2020.

Market Summary First Quarter 2020 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q1 2020

Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2020, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

World Asset Classes

First Quarter 2020 Index Returns (%)

Equity markets around the globe posted negative returns in the first quarter. Looking at broad market indices, US equities outperformed non-US developed markets and emerging markets. Value stocks underperformed growth stocks in all regions. Small caps also underperformed large caps in all regions. REIT indices underperformed equity market indices in both the US and non-US developed markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Dow Jones data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks

First Quarter 2020 Index Returns

The US equity market posted negative returns for the quarter but on a broad index level outperformed non-US developed markets and emerging markets. Value underperformed growth in the US across large and small cap stocks. Small caps underperformed large caps in the US. REIT indices underperformed equity market indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2020, all rights reserved.

Real Estate Investment Trusts (REITs)

First Quarter 2020 Index Returns


US real estate investment trusts outperformed non-US REITs in US dollar terms during the quarter.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Market Performance

First Quarter 2020 Index Returns

In US dollar terms, Denmark and Switzerland recorded the highest country performance in developed markets, while Austria and Norway posted the lowest returns for the quarter. In emerging markets, China and Qatar recorded the highest country performance, while Brazil and Colombia posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2020, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. Saudi Arabia and Argentina have been reclassified as emerging markets by MSCI, effective May 2019.

Fixed Income

First Quarter 2020 Index Returns

Interest rates decreased in the US treasury market in the first quarter. The yield on the 5-year Treasury note decreased by 132 basis points (bps), ending at 0.37%. The yield on the 10-year note decreased by 122 bps to 0.70%. The 30-year Treasury bond yield decreased 104 bps to 1.35%.

On the short end of the yield curve, the 1-month Treasury bill yield decreased to 0.05%, while the 1-year Treasury bill yield decreased by 142 bps to 0.17%. The 2-year note finished at 0.23% after a decrease of 135 bps.

In terms of total returns, short-term corporate bonds declined 2.19%. Intermediate-term corporate bonds declined 3.15%.

The total return for short-term municipal bonds was -0.51%, while intermediate muni bonds returned -0.82%. General obligation bonds outperformed revenue bonds.

One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

This report was prepared by Gregory Saliba.

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement


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