Fidelity Bank - Wealth Management
March 2020 Market Review
At the beginning of the year, many would suggest that the global economy was in the later stages of economic cycle; no one would have predicted a novel coronavirus (COVID-19) outbreak would cause a global economic sudden stop. Now the debate has moved on from when will there be a recession to how long will this pandemic induced recession last? Markets move quickly to reflect this new reality. US Stocks ended the quarter down 20% while investors sprinted into US Treasuries, which gained more than 8% during the quarter.
Until February 19th, equity markets more or less shrugged off concerns about the outbreak. However, the rapid increase in cases in Europe and the United States led to a sharp selloff. From February 19th to March 23rd, the S&P 500 fell nearly 34%! It took just 15 trading days for S&P 500 to fall more than 20%. This was the quickest the market had ever broken through to the other side of the bear market threshold (20% down).
With fears of sudden economic stop, commodity and interest rate dependent companies bore the brunt of the coronavirus panic. Energy stocks plunged 50.75% and financial stocks dropped 31.92% in the first quarter. However, no sector provided a truly safe harbor, with all 11 of the Global Industry Classification (GIC) sectors losing more than 11.93% during first quarter.
From a Style and Cap perspective, Growth stocks fared better than Value stocks across market cap. Large Cap and Small Cap Growth lost 14.10% and 25.76%, respectively, while Large Cap value lost 26.73% and Small Cap Value lost 35.66%.
As investors sought safe havens, the US Dollar gained against Developed Market and Emerging Markets currencies. The Dollar Index, which measures the US Dollar against Developed Market currencies, gained about 2.76% in the first quarter. The MSCI EAFE index lost 20.55% in local currency terms but lost more than 22.80% in US Dollar terms. The MSCI Emerging Market Currency Index lost by 6.03% versus the US Dollar in the first quarter of 2020. The MSCI Emerging Markets index lost 19.05% in local currency, but the conversion to US Dollars caused that loss to become a 23.60% for US investors. It is notable that Emerging Market equities outperformed developed markets, as investors are factoring in diminishing rates of new infection in China the shifting COVID-19 epicenters to the western world.
As investors looked for safety, rates fell across the yield curve causing the Bloomberg Barclays Treasury Bond Index to gain 289 basis points in March increasing treasury investors year-to-date return to 8.20%.
Source: Bloomberg LP, Fidelity Bank
While the flight to safety drove up Treasury prices, Investment Grade Corporates fell 7.09% and High Yield Bonds lost 11.46% in March. At the point of the peak stress, Investment Grade and High Yield Bonds’ yields reached 4.57% and 11.68%. The spreads to 10 Year Treasury bonds at the point of maximum stress reached 3.72% for Investment Grade corporate and 10.90% for High Yield Corporates. The long-term average spread for High Yield Bonds is about 5.13%. Investors are concerned companies may face cash flow and financing issues should the economic lockdown caused by coronavirus materially impact operations. With a lack of liquidity and panic in fixed income markets, the Federal Reserve enacted several market operations to provide liquidity and order to many fixed income markets. These efforts helped relieved some stress and pushed Investment Grade spread back down to 2.75% and High Yield spreads down to 8.77% at quarter end.
German Bunds had a bit of a rollercoaster in the first quarter. After rising to negative 15.9 basis during January, German 10 Year Bund’s yield plummeted to negative 86 basis points in the early part of March as contagion fears on the coronavirus sent investors fleeing from risk assets. The 10 Year Bund yield rose to negative 19.3 basis points in the middle of the month and finally end the quarter at negative 47 basis points.
Flight to safety and high demand for US Dollars detracted from Emerging Markets Debt in March, helping set the asset class back about 11.07%.
The Bloomberg Commodity Index lost 23.29% during the quarter as fears of a sudden economic stop sent commodities spinning. Compounding the issue, Saudi Arabia, OPEC and Russia could not agree on oil production levels. Oil collapsed from nearly $63 dollars a barrel on January 6th to nearly $20 dollars a barrel on March 31st. Gold buck the trend of most commodities gaining 1.91% during March. Year-to-date, gold is up 4.83% as investors have sought after the safe haven asset.
Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.
March 2020 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 3/31/2020. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.