Quarterly Newsletter for the 1st Quarter 2020
The major indexes started the year on a very positive note, with the Dow reaching all-time highs in late February. Then, unfortunately, the world was hit with a global pandemic- the Coronavirus. This led to massive selloffs and a market crash. The first quarter stock market returns were all negative. On a price return basis, the Dow Jones Industrial Average (DJIA) was down 23.20%. The Standard and Poor 500 (S&P 500) was down 20.00% and the NASDAQ dropped 14.18%. Overseas, the MSCI all Country World ex-US Index was down 23.36% and the MSCI Emerging Market Index had a loss of 23.60%. In the fixed income environment, the Barclays 1-3-year US Government/Credit Index showed gains of 1.69% for the first quarter.
Fixed Income Market (Bonds): The Fed, as you may recall, lowered rates three (3) times throughout 2019. On March 6th of this year, given the uncertainty surrounding COVID-19, the Fed lowered rates again. Then on Sunday, March 15, in a bold and surprising move, the Fed announced another emergency rate cut- moving rates to zero. The swifter-than-expected rate cuts were designed to prevent the kind of credit crunch and financial market disruption that occurred during the global financial crises just over a decade ago. In addition to the rate cuts, the Fed entered another round of Quantitative Easing, announcing it would purchase $700 billion worth of Treasury Bonds and mortgage-backed securities. Five foreign banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank) all took similar action in an effort to keep global markets functioning normally.
US and Overseas Equity Market (Stocks): Two major elements facilitated the downturn in both the US and the overseas equity markets. The first is the feud between Russia and the OPEC Nations over the production of oil. As a function of the overabundance of oil around the world, OPEC wanted to cut production and Russia did not. The result of this disagreement is that the oil market is now flooded, oil prices have dropped dramatically, and storage facilities are now full. Of interest is that May oil futures sold for negative numbers- meaning that an oil producer had to pay someone to take the oil they pumped out of the ground. Oil companies are, therefore, suffering financially. The second element was, obviously, the Coronavirus. This crash was brought about by fear - not economic factors. As you may recall, the crash of 2008 was brought about by the collapse of the financial institutions. The steps needed to control this hazardous virus (i.e.: business closings, shelter-in-place orders, massive unemployment, etc.) will, to a degree, have lasting economic effects and will bring additional volatility to the stock market. As a country, we have survived other pandemics: H1N1, Sars-CoV, MERs, and Ebola. When this Coronavirus is brought under control, the stock market will respond, and it will respond very favorably. The government relief program will be a positive and lend needed financial assistance to individuals and businesses. Economic news may continue to be negative in the short run but fade as time passes. This is a very fluid situation- changing daily. Today, States are back on track to open the economy. Of importance is how quickly consumers, that make up 75% to 80% of our economy, will have the confidence to engage in commerce and begin to fly, visit movie theaters, dine out, attend baseball games, head to the beach, etc., etc.
Conclusion: Interest rates will remain extremely low for the foreseeable future- at least until we work through the Coronavirus situation and rebuild the economy. The stock market here and around the world will recover. Again, subsequent to the crash, the market did rebound and has held relatively steady for the past several weeks. It appears to be very resilient and poised for growth when good news presents itself. Recall, the last downturn that we had that was greater than 20% was in December 2018 and 2019 proved to be a very successful year. We believe the market will be volatile for awhile; but, over the long-term, prove to be a wise investment. Additionally, the Fed seems to be committed to doing everything it can to support the market- don’t fight the Fed.
Permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.