DWM 1Q20 Market Commentary

April 07, 2020

Obviously, our market commentary’s purpose is to address the state of the markets, economy, and all things financial; but it goes without saying that our first and foremost concern is that of your health. One’s wealth takes a back seat to health. As of this writing, there are over 1.380 million world-wide infections and over 76,000 deaths. This is a public health crisis and it’s traumatic.

Amazingly, this wasn’t even on the radar when we wrote our last commentary and frankly blindsided pretty much all of us. It was only a little over a month ago when stocks were setting all-time record highs. The economy was actually accelerating in the early weeks of the quarter, with unemployment still at all-time lows and consumer confidence near all-time highs. After an 11 year bull market run, it only took a record-setting 16 days for the S&P500 to fall into bear market territory, meaning a fall of 20%+ from the peak. And it got worse from there before bottoming out on March 23 and the market rallying 9% the next day. This quarter brought us unprecedented volatility, with the last month experiencing trading days with moves of 3%+, creating further anxiety amongst participants and usually passive onlookers.

As normal, we will showcase how the different asset classes did, with the theme being “trying to run to safety” during this unprecedented period.

Equities: Pretty much the worse quarter on record since 1987. Equities, as evidenced by the MSCI AC World Index, fell 22.5%. Small cap fared ridiculously worse than large cap as evidenced by the Russell 2000 dropping over 30% and the S&P500 “only” down 20%. In a flight to safety, the biggest companies with the most solid balance sheets performed relatively better. The style box graph below tells a tale of which we’ve never seen before with the relative performance amongst those boxes at extreme levels. For what it’s worth, international equity* and emerging markets** were down over 23% for the quarter. 

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Fixed Income: Again, only the perceived safest havens did relatively well. The Barclays US Aggregate Bond Index was up 3.15% thanks to its significant exposure to Treasuries which was one of the only bright spots in bond land. The stand-out area within fixed income per the graph below was that part of the style box which focuses on higher quality and higher duration. Those with low quality experienced double-digit declines. For the record, the Barclays Global Aggregate Bond Index was down 0.33%, and the Markit iBoxx USD Liquid High Yield Index down 12%. 

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Alternatives: In a “baby being thrown out with the bath water” theme, alts still felt the pain as evidenced by the Morningstar Diversified Alternatives Index, off 13.82%. Much better relatively to equities but still in the red. Oil***, typically listed as an alternative, was the biggest story, falling over 65% amid a price war breakout between Saudi Arabia and Russia. Gold*** was a bright spot, +3.15%, in the rush to safety.

Cash: those that didn’t stay the course and tried to time the market by going to cash have lost out on double-digit moves up by the major stock indices since the 3/23/20 bottom.

So, yeah, it was a brutal quarter for portfolios with many investors suffering significant paper loses. A multi-asset class portfolio like the ones at DWM helped soften the blow, but values are considerably lower than last quarter’s statements. And the virus and its negative headlines aren’t going away any time soon. Most of this country has yet to experience their “New York moment”. It’s stressful for all. Further, damage on the economic front is going to be significant. It’s not a matter of if this is a recession but how deep? With millions out of jobs and still maybe a couple weeks away from receiving stimulus relief, this is a dire time.

Fortunately, governments, skilled professionals, caregivers, and many others around the world are stepping up in many ways to battle the virus. In the US, the Fed has done an amazing job with monetary policy to keep our markets liquid. And the government is providing unprecedented fiscal stimulus, including last week’s CARES Relief Act, in an attempt to keep this economy from cardiac arrest. A “Phase Four” and probably “Phase 5” Act are already being discussed to keep the heartbeat going. Further, there’s been some recent optimism driven by encouraging signs that things are starting to return to normal in China, fewer deaths per day compared to a week ago in Italy and Spain, and hospitalization rates in New York showing signs of slowdown.

No one alive will ever forget this pandemic – that’s for sure. But we’ve recovered from multiple shocks before this, each time with the market going higher. Long-term investors will see similar new highs in the not-so-far out future. It won’t be a smooth ride with most likely lots of suffering and changes to normal lifestyle along the way, but we’ll all get through this collectively. As our recent blog on what not to do now explained, try to remain disciplined and refrain from drastic knee-jerk reactions. Let us know if you need assistance – we’re always here to help, particularly in such challenging times like these.

As always, don’t hesitate to contact us with any questions or comments.

Brett M. Detterbeck, CFA, CFP®


*represented by the MSCI AC World Index Ex USA
**represented by the MSCI Emerging Markets
***represented by Crude Oil WTI Front Month
***&represented by the iShares Gold Trust