We have all lived through a lot of change these past few months because of the coronavirus. Over the course of this coming year, the world will return to everyday routines, albeit with some differences. Some of us will be getting on airplanes for long-overdue visits to see family, though we may keep doing weekly FaceTime calls with loved ones. Many of us will be back in the office, though likely doing some virtual calls with clients now that it seems everyone is using Zoom. We can even look forward to a time when we have to wait 30 minutes for a table at our favorite restaurant, though we may occasionally still order DoorDash, too. The world will be a different place, but there will also be a lot of similarities to our pre-coronavirus lives as well. As routines return, eventually so will the economy.
Throughout the first quarter of 2020, many days of extraordinary volatility happened with regularity. The first half of the quarter saw all-time highs in the U.S. stock market coupled with low unemployment. The latter half of the quarter saw the spread of COVID-19, the effects of which have rippled through the world economy as many countries have issued lockdowns or stay-at-home parameters to slow its spread. In response, governments and central banks have deployed stimulus packages and monetary policy tools to curtail the effect the coronavirus has had on world economies and financial markets.
The global financial markets witnessed volatility not seen since the financial crisis in 2008–2009, with the U.S. stock market falling 20.0% from January 1 through March 31. Of the 62 trading days in the quarter, 11 days had losses of more than 3% and eight days had gains of more than 3% (as proxied by the S&P 500 Index). It is important to remember that bear markets historically only account for 20% of the days in U.S. stock market history. Stock prices will fluctuate but the volatility associated with the coronavirus should not stipulate a change in course. The volatility we have experienced is shown in the chart below, detailing the daily performance of the major U.S. market indices through the first quarter of 2020.
Many areas in fixed income markets have performed well during this turbulent first quarter. For example, long-term government bonds were up 20.4% from January 1 to March 31 (as proxied by the iShares 20+ Year Treasury Bond ETF). We hold these bonds in high and moderate equity portfolios as they historically have performed well when equities have not, and that remained true in the first quarter. Through rebalancing, client portfolios have been able to capture these gains and reallocate them to equities at cheaper levels. That is one of the benefits of a well-diversified portfolio.
Investors have once again been challenged to stay disciplined and buck the notion that it is different this time. On the surface, it might be difficult to consider any 20%+ drop “normal” but so far this market downturn does appear to be normal in terms of the market reaction. Markets are functioning. Unlike 2008, there is no breakdown of the fundamental building blocks that make up our financial systems. The chart below illustrates previous financial crises and the subsequent portfolio performance one, three and five years after.
We design long-term plans to withstand market downturns, including rebalancing client portfolios during the first quarter of 2020. It is our belief that we will persevere if we all work together and adhere to our thoughtfully designed plans, whether goals are financial, personal or a combination of both.