The first three months of 2020 may have played out like an April Fools’ prank, but it was no joke. Because of Covid-19 and the oil price war, the 1st quarter may have been the most volatile period in market history. Although we began the year with a continuation of the long bull run up, before the quarter ended we witnessed the S&P 500 dropping over 35% from its peak and the first bear market since 2008. A bear market is defined as a 20% drop from peak, and we saw this decline happen in 22 days — by far the quickest retreat into bear territory on record. By quarter’s end the S&P 500 returned -19.6% with other stock indices around the globe falling in similar fashion.
The year started off on a bright note with the signing of the Phase 1 agreement with China, basically ending the trade war between the US and China. However, this quickly gave way to the fear surrounding Covid-19 and the subsequent shutdown in economies trying to combat the spread of the disease. To make matters worse, differences between Saudi Arabia and Russia erupted into an oil price war which pushed oil prices down from $61/barrel at the start of the year to hover near $20/barrel by the quarter’s end. As a result, commodities declined 23.3%. Other real return strategies fell similarly with real estate dropping 27% and global infrastructure losing 29%.
While equities declined, high quality bonds appreciated due to the drop in yields. All along the curve, yields declined more than one percentage point from their already low levels. However, lower quality bonds followed stocks down as concern grew that their ability to meet their commitments would be impaired.
Absolute return, or our risk management strategies, helped to reduce the decline in portfolios. Equity market neutral was down 5.2%, global macro was down 6.4%, and managed futures produced a positive 3.3% return. To note, during March market neutral was up 1.9% and managed futures was up 5.4%. In addition, our dynamic hedging strategy, which reduces exposure to the most volatile asset classes during market stress (as measured by the VIX Index), helped to further protect portfolios against losses.
This pandemic is different from previous outbreaks because of the government’s shutdown of a good portion of the economy to contain the spread; however, there is no reason to believe the outcome will be any different. The economy was strong going into the pandemic and the government has signaled that it will do all that is necessary to keep it moving forward. For now, the primary concern is controlling the spread of the virus, as it should be. Once containment is achieved, the markets and the economy will recover.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.