The global equity markets began 2020 with a bang. New equity market highs were seen into late February. Not since December of 2018 have we seen such selling with a vengeance. The equity markets took three weeks to fall 16% in December of 2018; in March 2020, it took only six trading days.
For the quarter (despite the sharp rally of the last few days of March), the S&P fell 20%, Dow Jones Industrial Average fell 23%, and the NASDAQ fell 14%. In US dollar terms, European bourses fell 20% to 30%. At quarter-end, the US Treasury three-month T-bill closed at 0.06%, the 10-year note at 0.67%, and the 30-year bond at 1.32%. Mortgage refinancing should soar later this year.
Waterfall declines often feared and rarely seen was in evidence in March. From the high in February to the low on March 23rd, the S&P fell 33.9%. Liquidity was at a premium and was hard to find. Flight to quality was evident as US Treasuries rallied and at one-point yields were negative out to six months. Corporate bond spreads to Treasuries ballooned as the bid side disappeared. ETFs, both corporate and equity traded at substantial discounts to NAV in the dislocation. The Federal Reserve had multiple emergency meetings, lowered interest rates two times, the second by 100 basis points. Then, in a sign of just how bad things were, they announced Quantitative Easing ‘Unlimited’. The Fed would buy US Treasuries of unlimited amounts, provide repurchase agreement lines of $1 trillion and create new investment schemes to buy corporate bond ETFs along with several new programs to help small businesses.
On the emerging market front, for the quarter, outflows from emerging market exchange-traded funds hit a record high of $7.9 billion.
On the political front, the US Congress passed a two trillion-dollar emergency bill, the third and largest of those passed during the quarter. It will no doubt not be the last such bill passed in 2020 and yet to be determined if it will be the largest. The two major political parties are vying to show they are the ones that are best at helping the America people the most. While the Presidential election is in November, it doesn’t have the same media focus, it did just six weeks ago. But more on that next quarter.
Our search for undervalued assets required patience and was rewarded at quarter’s end; however, the search never ends. As the Covid-19 epidemic takes its toll on humanity, we can expect further dislocation in global markets. Global company earnings will continue to be negatively impacted for the next two quarters as will the global fixed income markets. It will take some time for the ‘new normal’ to establish itself. Until then, stay healthy.