It is remarkable how much can change in a month. In our last Investor Insights, we covered the shock to the markets caused by COVID-19, specifically the infection’s impact on the Chinese supply chain and specific U.S. industries likes airlines and cruises. Since that time, we have seen the U.S. become the global leader in reported cases of COVID-19, the U.S. and global economy largely shut-down as a result of self-isolation measures, and, with all of this once-in-a-lifetime upheaval, significant volatility and losses in both the stock and bond markets. Encouragingly, we have also seen swift and robust responses from governments at federal and state levels in the U.S. and from other national governments around the world, and capital markets have reacted positively.

The Federal Reserve has committed to use any tool necessary, having already cut rates to zero and implemented massive asset purchases—what’s being called QE Infinity—to create demand in various spaces of the capital markets. The federal government passed and signed into law a $2 trillion spending bill to aid both businesses and workers, and both parties signaled their willingness to legislate additional aid if needed. The difficulty in responding to a pandemic is that lawmakers need to effectively address both the mitigation of the spreading virus as well as the economic repairs needed from the damage of social distancing. We can’t know the scope of the latter until the former is under control. Because of that uncertainty, market expectations continue to be very fluid. This newsletter will address what has happened in the stock and bond markets separately and share what signs we are looking for to indicate what will happen next.

From February 20^th to March 23^rd, just 23 trading days, the S&P 500 gave up over three years’ worth of gains. The peak-to-trough decline during this period was 33.92%, and it involved some of the biggest single-day moves in the market that have ever been seen. From February 20^th through the end of March there were eight different days in which the S&P 500 moved by more than 5% in either direction, and there were only five days during which the index moved less than 1%. The VIX, aka the “fear index”, went as high as 83.56 during the sell-off, an all-time high that exceeded peak levels during October 2008 as the Great Financial Crisis got under way. As bad as it was for the S&P 500 index of large U.S. companies, it was much worse for mid and small companies in the U.S. as well international stocks. While the S&P 500 finished the month negative by 12.35% the S&P MidCap 400 and S&P 600 SmallCap returned -20.30% and -22.40%, respectively. The MSCI EAFE index of developing country stocks was negative by 13.35% for the month while the MSCI EM index of emerging market stocks fell by 15.40%.

Despite the bloodbath, stocks finished the month of March on a very strong note. All of the aforementioned indexes had double digit returns from March 24^th through the end of the month, with the S&P 500 gaining 15.57% during the final six trading sessions of the month, including a one-day return of 9.38% on March 24^th. This titanic rally can be attributed to a number of factors. For one, investors saw bold monetary and fiscal policy begin to take shape. First and foremost, the Fed announced an unprecedented degree of monetary support for the economy that is of such a large scope that it is difficult to comprehend. For reference, the Fed’s balance sheet grew by approximately $3.7 trillion in total as a result of stimulus from the Great Financial Crisis, peaking in May 2016 at $4.5 trillion. By March 25^th the balance sheet had already grown to $5.3 trillion, a 12.4% increase in just a week. Wall Street is now calling for the Fed’s balance sheet to hit $10 trillion by the end of the year, the long-term implications of which leave many unsettled and wondering whether the Fed has gone too far.

Stocks were also likely lifted by the $2 trillion aid package legislated by congress as well as the rhetoric coming from President Trump about the need to “reopen” the economy sooner than perhaps doctors were advising and markets were expecting. His target date of April 12^th was later pushed back to April 30^th, but Trump’s eagerness to get the economy back up and running has been noted by investors. The big question, of course, is whether the worst for the stock market is already behind us or if we will see a new floor in the coming weeks or months. It has been pointed out that at least part of the rally to close out the month can be attributed to end-of-month rebalancing by money managers who want to bring their equity exposure up before their holdings are reported. If this was a factor, it will be one less leg supporting the stock market as we enter April. Key economic and corporate data will begin to come out, starting with the latest monthly jobs figures on April 3^rd and continuing through corporate earnings season as companies signal the impact of COVID-19 on their profitability and, in some cases, survival. Regardless of the causes of the month-end rally, whether it is sustained, it serves as a stark reminder to those who are tempted to time the market: history has shown, as has this recent crisis, that some of the best returns in the market occur right on the heels of the worst days. If you bail out when the market is falling, there’s a good chance you will miss the opportunity to recoup your losses.

Things were just as dramatic on the fixed income side of the markets. The yield on the 10-year US Treasury Bill fell as low as 0.398% on March 9^th, setting a new all-time low by a significant margin even over last month’s reported all-time low. Frustratingly for investors, short-duration high quality fixed income—the type that should serve as ultimate ballast in a time like this—came under significant downward pressure throughout the month. Normally a haven for cash fleeing from higher risk assets, short investment grade quality became the first stop for liquidity for many institutional managers who needed to sell assets to free up cash. The spread, or difference, in the yield between a short-term corporate bond and a short-term government bond widened significantly from its normal range of around 1% to nearly 4.5% during the month of March. The good news for investors is that this stress endured by short-term investment grade bonds shows every indication of being a temporary liquidity-driven event. A similar phenomenon occurred during the Great Financial Crisis and it took less than three months for the asset class to recover.

The high yield part of the fixed income took the beating you would expect it to in a market like this, though it was exacerbated further by the global energy crisis that is now under way. Both connected with COVID-19 and its own geopolitical event, primarily between Russia and Saudi Arabia, the price of oil has fallen precipitously, due first to the falling demand—people in self-isolation consume less gasoline and jet fuel—as well as a supply glut. The price of one barrel of WTI Crude Oil fell below $20 toward the end of the month. With neither the COVID-19 crisis or the OPEC+ production wars showing a clear end in sight, it’s possible that the price of oil will continue to fall.

We understand that these are uncomfortable times for investors. This crisis, with the dual threat of health and economic consequences for the entire world, presents challenges unlike any most of us have seen in our lifetime. With that said, no two crises are alike, and the notion that you should invest differently this time is dangerous. We encourage all investors to continue focusing on their long-term goals when making investment decisions rather than get caught up in the short-term drama of the markets.

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