Market reflections for first quarter 2020

The first quarter of 2020 was a tumultuous time both in the markets and in our everyday lives. The COVID-19 coronavirus that first appeared in late December has spread across the globe, forcing people to adhere to social distance policies and change their everyday habits. We hope everyone is staying safe and healthy during this trying period.

Markets fell sharply in the first quarter amid uncertainty surrounding COVID-19’s economic impact. The longest running bull market in U.S. history ended abruptly after a record 132 months when the S&P 500 declined more than 20% from its previous market high.1 As markets declined, volatility increased. At one point, the S&P 500 moved up or down by at least 4% in five consecutive trading days, the most volatile consecutive trading days since 1929.2

Volatility also reared its head in oil markets after Russia and Saudi Arabia failed to agree to new production cuts amid slowing global demand due to the virus. Saudi Arabia responded by cutting oil prices in a bid to gain market share, driving oil prices still lower. Oil prices finished the quarter down over 60%.3

In an effort to flatten the virus’s growth curve, people have been encouraged to stay home, impacting economic activity across a variety of sectors. Governments and central banks around the world have responded by taking strong steps to provide fiscal and monetary support.

Globally, fiscal stimulus of over $5 trillion has been announced, and central banks have made close to 90 interest rate cuts in March to help stimulate economies.4 In the U.S., Congress passed several phases of stimulus, the most recent being the $2 trillion CARES Act, the largest relief package in U.S. history. Meanwhile, the Federal Reserve cut the federal funds rate to near 0% and deployed a number of additional (in some cases) unprecedented measures to maintain liquidity and support normal market functions.

Periods like this are undoubtedly stressful and challenging to weather, but long-term investors must recognize that markets have historically rewarded those who have maintained discipline during tumultuous times.

First quarter 2020 returns

Returns shown in the chart above are for first quarter 2020.
Source: Morningstar®, data as of March 31, 2020. See disclosure for more information.

Stock performance across the globe

U.S. large-cap stocks, represented by the S&P 500, declined -19.6% in the first quarter. Within the large-cap segment, growth stocks (Russell 1000 Growth Index, -14.1%) finished ahead of value stocks (Russell 1000 Value Index, -26.7%) for the quarter.

Small-cap stocks, represented by the Russell 2000 Index, were down -30.6%, lagging U.S. large-cap stocks for the quarter. Within small caps, value stocks (Russell 2000 Value, -35.7%) lagged growth stocks (Russell 2000 Growth Index, -25.8%) during the first quarter.

On the international front, the MSCI EAFE Index was down -20.6% in local currency terms and finished down -22.8% in USD terms. The U.S. dollar strengthened as investors moved from other currencies to the perceived safety of the dollar.

Emerging markets stocks, represented by the MSCI Emerging Market Index, were down -19.1% in local currency terms and -23.6% in USD terms.

The structural tilt towards small cap stocks and value stocks has certainly weighed on your account returns this quarter, but in this trying period we remind you of the strong resurgence of small cap stocks and value stocks in 2009 coming out of the 2008 financial crisis. 

World asset classes

Returns for the first quarter 2020

World asset classesSource: Morningstar®, data as of March 31, 2020. See disclosure for more information.

Fed responds aggressively to provide economic support

Bonds provided stability relative to stocks, but liquidity was challenged even for high-quality bonds prior to the Fed taking aggressive action. In addition to two rate cuts, the Federal Reserve took other bold steps to aid market conditions, including restarting bond purchase programs and establishing lending facilities to help maintain liquidity in the bond markets. The unprecedented purchase of municipal bonds and bond ETFs signaled the Federal Reserve’s intention to supply liquidity and support to wide swaths of the bond market, not just treasury securities.

The 10-year nominal treasury bond yield fell to an all-time low of 0.54% before increasing to end the quarter at 0.70%. Yields finished lower across the U.S. yield curve for the first quarter, which steepened as yields of the three-month Treasury bill, which declined 1.4% fell more than the 1.2% decline of the 10-year Treasury note. Remember, as yields fall, bond prices rise.

The Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, posted positive returns and gained 3.1% for the first quarter, finishing as the strongest performing asset class for the period. Municipal bonds, represented by the BBgBarc Municipal 1–10Y Index, finished down slightly, returning -0.6%.

Emerging market debt declined in the first quarter as the stronger U.S. dollar and falling commodity prices weighed on returns. The JPM EMBI Global Diversified TR Index, representing bonds denominated in U.S. dollars issued by emerging-market governments, returned -13.4% for the quarter. High-yield bonds (represented by ICE BofAML BB-B US CP HY Index) also posted losses and finished down -11.9% as credit spreads widened.

Taking a long-term perspective: “The stock market is a device for transferring money from the impatient to the patient”5

Markets offered a roller coaster ride for investors this past quarter, and it was a true test of discipline to maintain perspective in the face of such an unsettling and unprecedented series of events. As challenging as it may be, long-term investors cannot let the gravity of the current situation make them lose sight of their longer-term goals. For investors who have been invested in the stock market, as recently as February 19, the stock markets reached new highs, and even including the past few turbulent weeks, the MSCI All Country World Index has returned nearly 200% since the last major pullback in March 2009.6

Clearly, those who were able to stay invested have been rewarded for doing so, even in light of current market performance. While we can’t predict how long the current downturn will last, history shows that bull markets have tended to last longer than bear markets, and markets have exceeded each past market decline to reach new highs. We believe, a diversified approach and disciplined strategy will help investors through the painful periods and to better position them to realize the long-term goals they’ve worked hard to achieve.

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U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Market reflections for first quarter 2020

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Wipfli Financial Advisors Investment Committee

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Market reflections for first quarter 2020

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