“There are decades where nothing happens; and there are weeks where decades happen.” Vladimir Ilyich Lenin.
The quote above has been revisited quite a bit these days because it seems to perfectly capture our current situation. Just a few short weeks ago we had 110 successive months of job growth in the U.S., a bull market in excess of 10 years, the world economy was globalized, companies managed inventories ‘just-in-time,’ we had traffic jams, meetings, and corporate debt. And then, just like that, the world changed. There were roughly 10 million jobless claims in two weeks, we entered a bear market in a record 16 trading days, the world economy is becoming more decoupled, companies (and people) are stockpiling, freeways are all but empty, meetings for many are exclusively online, and corporate debt is in the process of being replaced by government debt. And that’s just a fraction of what has happened in the last few weeks.
On February 19 the S&P 500 closed at 3386.15, up 5.1% for the year, the Russell 2000 was up 1.6%, and the MSCI-EAFE was down -0.8%. Then the trajectory of financial markets reversed. The S&P 500 ended the quarter down -19.6%, the Russell 2000 was down -30.6%, and the MSCI-EAFE was down -22.8%. But these quarter-end numbers bely the severity of the intra-quarter collapse. From its intraday peak on February 19 to its intraday low on March 23 the S&P 500 dropped -35.4%. After the passage of a $2 trillion plus economic rescue package by Congress and aggressive monetary easing by the Federal Reserve, the S&P 500 rebounded 15.2% prior to quarter’s end.
The market sell-off was indiscriminate with all sectors of the market suffering deep losses. But as the market settled a bit, there began to emerge more distinct differences in performance across market sectors. By the end of the quarter Technology (-11.9%), Health Care (-12.7%), and Consumer Staples (-12.7%) were the best performing sectors. Energy (-50.5%) which was clobbered by the one-two punch of both the abrupt cessation of economic activity and a price war between OPEC and Russia, Financials (-31.9%), and Industrials (-27.0%) were the worst performing sectors. And the long-standing outperformance of growth stocks relative to value stocks continued, with the Russell 1000 Growth dropping -14.1% while the Russell 1000 Value fell -26.7%.
Bonds fared better; but still experienced a volatile quarter. The Bloomberg Municipal Bond 7-Year Index was down -1.0%, while the Bloomberg U.S. Aggregate was up 3.2%, largely based on a strong rally in the price of U.S. Treasuries. The 10-Year Treasury yield stood at 1.56% on February 19. As Treasury prices soared due to a swift and sudden flight to quality, yields on 10-Year U.S. Treasuries plummeted to a low of 0.54% on March 9, rose back to 1.18% on March 18, before falling again to 0.70% by quarters end. Corporate bonds, however, fared worse than municipal bonds and U.S. Treasuries due to fears over their credit risk. The Bloomberg Barclays U.S. Corporate Investment Grade Index fell -3.6% for the quarter. High yield bonds declined even more, with the Bloomberg Barclays High Yield U.S. Corporate Index falling -12.7%.
We posted a piece on February 28 addressing the looming threat of the Coronavirus. We still do not know how long this crisis will last or how severe it will be when all is said and done. But the key takeaways from our earlier piece still hold true today, and we would like to reiterate those points as we look forward today. Asset allocation is valuable and is meant to lessen the impact of stock market losses, not eliminate them entirely, so that you don’t succumb to the urge to sell stocks into weakness. Cash reserves earn very little, but we don’t believe that taking on additional risks to achieve marginally higher yields on cash is worth that extra risk. Rebalancing and tax loss selling are opportunities, and you don’t have to get the timing exactly right to take advantage. Remember, you own stocks for a multi-year time horizon, not for what happens in a week, a month, or a year. Market corrections and bear markets can be an opportunity to put cash to work at lower valuations or to rebalance a portfolio into higher quality opportunities at lower prices than were available until recently.