Equity markets around the world saw strong 2019 gains and the decade ended on a high note in the U.S. with equities up 31.5% (as measured by the S&P 500 Index) and bonds up 8.7% (as measured by the Bloomberg Barclays US Aggregate Bond Index) for the year. January was a continuation of these strong returns as the “Phase One” trade deal with China eased trade tensions, Brexit was getting finalized and the Federal Reserve was likely going to pause interest rate increases for 2020. All of this created a positive backdrop for a promising 2020 until mid-February when the world began facing a global pandemic with a new coronavirus, COVID-19. Many countries around the world enacted “shelter in place” policies which caused an economic standstill unlike anything we’ve ever seen in history and the long-running bull market, which lasted approximately 11 years, was over. Domestic equity markets posted their worst quarter since 2008 down -19.6% during the first quarter as measured by the S&P 500 Index, bringing the 1-year return down to -6.98% at the end of the quarter.
Equity performance deteriorated even more for the small- and mid-cap companies with the Russell 2000 Index and Russell Midcap Index down -30.61% and -27.07%, respectively during the quarter.
Growth stocks continued to outperform their value counterparts across all market capitalizations. While all S&P 500 Sectors produced negative returns during the quarter, technology was the only sector that had a positive return over the trailing 12 months at 10.4%. Energy was the worst performing sector while the oil price war continued between Saudi Arabia and Russia. Brent Crude oil prices fell from $66 in January to $26.42 at the end of the quarter and the energy sector fell 50% during that same time.
Equity markets outside of the U.S. posted even worse losses in the first quarter with the Developed and Emerging Markets indexes down -22.8% and -23.6%, respectively. The UK equity markets declined the most during the quarter losing -28.8% due to weakening corporate profits prior to the coronavirus outbreak.
The Federal Reserve Board took immediate action, prior to their scheduled March meeting, to return the Fed Funds rates to zero as they did in the ’08-’09 recession by cutting rates by 50 bps and then 100 bps a week later. In addition to these rate cuts, the Federal Reserve said they will do whatever it takes to provide massive amounts of liquidity to the financial system. At quarter-end, the Treasury yield curve ended at these yields: 2-year 0.23%, 5-year 0.37%, 10-year 0.70% and 30-year maturities at 1.35%.
Initial estimates for Gross Domestic Product (GDP) in the first quarter are coming in around 1%, significantly down from the previous quarter’s growth rate of 2.1%. The Purchasing Manager Index, which measures the economy’s service sector, declined from 49.4 in February to 39.8 in March (NOTE: Numbers above 50 indicate acceleration in the service sector). Approximately 20% of GDP comes from the service sector and it is widely anticipated the social distancing measures to combat the spread of the coronavirus will likely push the U.S. economy into a recession.
Due to millions of unemployment claims during the month of March, the U.S. unemployment rate increased to 4.4% during the first quarter and is expected to rise considerably more as employees continue to be laid off or furloughed due to the effects of the coronavirus. In March, nonfarm payroll employment fell by 701,000, almost two-thirds of these jobs were in the leisure and hospitality sector. The number of unemployed persons rose by 1.4 million to 7.1 million in March.
The Consumer Price Index declined 0.40% in March, the largest monthly decline since January 2015. The year-over-year headline inflation rate increased by 1.5% during the quarter, which is down from the previous quarter at 2.3%. A sharp decline in gasoline prices was the major cause for the monthly decline, in addition to decreases in airline fares and lodging away for home. The food index rose sharply with the food at home index rising 0.50% in March, offsetting some of the decline in the Index.
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