TFC Updates:
January-March is always interesting in the Dall’Olmo household. Each daughter has a birthday, and the ones who are not celebrating want the birthday girls presents. It makes for great theatre, let me tell you. Maddie turned 6, Olivia-4, Lucy-2. To say they are all opinionated is a gross understatement. It has been a fun time spending so much time at home over the last few weeks and helps to put things in perspective.
Both Derek and Melissa have worked from home since March 23, but scheduled meetings went entirely virtual a week or two prior. The only major adjustment was continually trying to find a quiet spot in the house!
The stay-at-home order has certainly changed the immediate business and social landscape. Q1 started off fairly normal. Client visits during the quarter generally consisted of reviewing cash on hand, cash flow, and projecting the upcoming tax season. That “normal” Q1 agenda was quickly turned on its head in March and became the craziest 2+ weeks of my career.
TFC and clients all pivoted very quickly to digest the flurry of information being released daily. Government relief and stimulus programs became a very large topic of discussion as just about everyone was affected in some way. This continues to be the case today, especially with business clients, or those that are now un/underemployed, sorting through the nuances of various programs (PPP, EIDL, Expanded Unemployment, eFMLA, etc.). Fortunately, as a small firm, we have able to quickly interpret this information, along with our accounting and legal partners, and deliver pertinent information to affected clients almost daily. The term “drinking from a firehose” has never been so true in my career.
Looking forward, TFC will continue to focus on things we can control, for ourselves and our clients. I will try to keep you updated in a timely fashion as things progress. We appreciate the conversations and look forward to having them in person sooner than later. As always, if you need anything, please let me know. Keep your heads up, this too shall pass. DPD
Economic and Global Markets Summary:
It was a tumultuous quarter for stock markets around the world. COVID-19 was the big story, progressing from China in December, to Europe by January, and the U.S. by February.
Equity markets hit fresh highs in February, generally shrugging off any possible risks from the Coronavirus. The gravity of the global health situation finally took hold in late February when the U.S. stock market fell sharply. For perspective, we look to the Chinese stock market, which struggled before the U.S. & Europe, then actually began to outperform the rest of the world in the second half of the quarter.
The Federal Reserve did what they could to stem the volatility that arose in February and March, dropping the Federal Funds Target Rate to near 0%, but U.S. equities still produced the worst quarter since 2008.
Mortgage rates are near all-time lows. Electricity & gasoline prices are near all-time lows as well (adjusted for inflation).
The good news? Historically speaking, the worst quarterly returns then produce strong returns looking ahead.
I recently read (on twitter of all places) a very succinct summary of the bull and bear cases moving forward:
- Bull: Everything opens in 6 weeks. Economy back to normal in 6 months. Low gas prices and interest rates fuel economy. The roaring 20’s is now the 2020’s.
- Bear: Unemployment goes to 20%. Everything does not go back to normal for a year or two. There is a huge demand shock, and the lockdown and oil-price shock create depression-like conditions.
Stocks:
The S&P 500 index fell 20% during the quarter. The Dow Jones Industrial index lost 23%, the NASDAQ declined 14%. The Russell 2000 index (small companies) lost 31%.
Looking at sectors, the energy sector suffered the sharpest loss, returning -51% while the technology sector had the narrowest decline of -12%. Once again, large tech companies outperformed the broader market. During times of extreme volatility in Q1, consumer staple stocks (e.g. Walmart, Kroger, and Dollar Tree) provided some cushion. Kroger and Walmart managed to hit multi-year highs in March. Healthcare equities also beat the broader market as hopes of a COVID-19 vaccine boosted some drug companies’ share prices. The real estate sector took a big hit to start 2020 as many real estate investment trusts, like hotels & restaurants, were shunned by investors expecting major earnings declines from those firms due to social distancing & shelter-in-place orders across the country.
Overseas, both international developed market stocks and emerging markets lost 24% during the first quarter. Spain and Italy were particularly hard hit as those nations also had some of the worst impacts from COVID-19. The major European markets in Germany, the U.K. and France were down about 25%, hitting their lowest levels since 2013. In Asia, China was down just 10% and their economy is already recovering.
Volatility:
The CBOE Volatility Index (VIX) surged during the quarter, peaking in the 80s – the same level as was seen during the peak of the 2008 financial crises. By the end of March, the ‘fear gauge’ had eased back toward the 50s, a still very high figure relative to the last several years when it ranges from near 10 to about 20.
Bonds:
Treasury securities were seen as a safe-haven. Long-term bonds returned a whopping 22% for the quarter while the aggregate fixed income index returned a steady 3%.
There was a small stretch when treasuries were actually sold-off- due to market mechanics – safe bonds were seen as a ‘source of funds’ by investors seeking to raise cash. The bond market somewhat normalized by the end of the quarter, however, and interest rates continued to fall (which means bond prices rose). The 10-year treasury rate ended March at 0.67% – the lowest quarterly settle in its history. 30-year rates are near 1.3%.
More credit-sensitive (riskier) bond investments, such as high yield and emerging market debt, suffered heavy losses due to their perceived credit risk.
Economy:
COVID-19 sent shockwaves across global economies. For the U.S., jobless claims have surged into the millions per week as many businesses have been forced to close their doors with most of the nation facing lockdown orders. While January and February saw strong employment reports and very low unemployment rates, March’s figures were dismal with 701,000 jobs lost and an unemployment rate at 4.4%.
Inflation is expected to run very low with little in the way of consumer spending through Q2. March manufacturing data suggested a contraction in that sector is underway. As a response to the dramatic drop in economic growth, the Federal Reserve slashed interest rates to near 0% and enacted stimulus measures to assist credit markets. On the fiscal side, Congress passed a $2.3 trillion stimulus package of their own in March, and more may be on the way. Significant assistance was also provided to small business owners who are taking the brunt of the COVID-19 economic impacts.
Economists expect a rather sharp rebound in GDP during the back-half of 2020 if we can get through the near-term turmoil. In short, they are expecting the recession to be sharp, but short-lived. Only time will tell.
Commodities & Currencies:
Oil had its worst quarter on record, dropping 67% while wholesale gasoline fell 63%. An unexpected global recession due to the Coronavirus put economically-sensitive commodities under severe pressure.
Gold provided a little cushion, rising 5% for Q1, but silver dropped more than 20%. Overall, the commodity index is trading at multi-decade lows.
The US Dollar climbed to decade-plus highs during March but then settled back to its prior range by the end of the quarter.
As Americans get back to work later this year, gasoline prices should be remarkably low. Also, home electricity bills will be very low this spring and summer with a major decline in natural gas prices.
By: Derek Dall’Olmo, CFP® & Mike Zaccardi, CFA®
Featured Image: Photo by cottonbro on Pexels