Financial markets have ended the first quarter of 2020 severely bruised and still reeling from a widespread sell-off driven by the economic shock of the coronavirus pandemic.
Financial markets are still reeling from the widespread sell-off of risky assets.
The fire sale was most pronounced in risky assets such as equities and corporate bonds with some markets posting their worst quarterly performance in decades.
The S&P 500 Index slumped 20.2% during Q1, surpassing the 20% threshold that traditionally heralds a bear market. This was the index’s worst performance since the height of the 2008 financial crisis.
Approximately $80 billion was wiped off the SPDR S&P 500 ETF (SPY US), the world’s largest ETF, which ended the quarter with AUM of $225bn.
The Dow Jones Industrial Average suffered an even greater quarterly drop of 23.6%, its worst showing since Q4 1987, leading to significant losses for the $18bn SPDR Dow Jones Industrial Average ETF (DIA US).
Compared to other major US equity benchmarks, the Nasdaq 100 Index escaped the quarter relatively unscathed – the $80bn Invesco QQQ Trust (QQQ US), by far the largest ETF to track the index, fell 11.7% by the end of March.
US equity volatility remains high with the VIX Index having soared 257% over the quarter although the ‘fear gauge’ is somewhat down from its peak on 16 March.
The situation was equally grim across the Atlantic. The $5bn iShares Stoxx Europe 600 UCITS ETF (0MLD LN), the largest ETF to track the pan-European Stoxx Europe 600 Index, tumbled 23.2% in euro terms, while the $8bn iShares Core FTSE 100 UCITS ETF (ISF LN) sunk 24.5% in pound sterling.
A global recession is widely expected. Economists at Bank of America predict three consecutive quarterly contractions for the US economy – 7% in Q1, 30% in Q2, and 1% in Q3, followed by a 30% expansionary boom in Q4. Similarly, Europe’s 2020 growth forecast was cut from a 1% expansion to a 7.6% contraction. (All annualized figures)
While the pain appears acute but temporary, analysts warn the fall-out could linger due to the sheer volume of workforce dislocations.
The negative outlook has forced governments globally to begin implementing massive stimulus programs aimed at reviving failing job markets, propping up small businesses, and providing much-needed social relief. Central banks are doing their part too, slashing interest rates – sometimes to zero – and conducting enormous amounts of quantitative easing.
Corporate bond markets ended the quarter firmly in negative territory; however, a recovery in the last week of March helped to moderate their previous steep declines.
Investment-grade bond prices fell sharply in March owing to a sudden re-evaluation of corporate credit risk, a slew of credit rating downgrades, and a spike in fund redemption requests from panicky investors. However, the market has started to bounce back, buoyed by the Federal Reserve’s announcement that it would extend its asset purchase program to corporate bonds and ETFs that hold them, a first for the institution.
The $40bn iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD US) closed off the quarter with a loss of -3.3%, having suffered a drawdown of -18.8% between 9 – 20 March.
High-yield bonds followed a similar pattern. The $15bn iShares iBoxx $ High Yield Corporate Bond ETF (HYG US) crashed 20.9% between 4 – 23 March and ended the quarter down 11.9%. Despite the Fed’s program not extending to junk-rated bonds, confidence in the sector has returned as investors became reassured that the US can survive the pandemic without entering into a full-blown credit crisis.
A flight to safety helped lift the $16bn iShares US Treasury Bond ETF (GOVT US) to an 8.5% gain for Q1. The benchmark 10-year Treasury yield fell from 1.92% to 0.69% over the period.
Gold, another traditional safe-haven asset, delivered a mixed performance. The price of the yellow metal dropped 10.9% between 11 – 19 March, although market commentators attributed the sell-off to forced selling from investors urgently requiring liquidity to meet redemptions or settle margin calls arising from loss-making equity and credit positions. The commodity has since been staging a recovery and the $50bn SPDR Gold Shares (GLD US), the largest ETP to provide exposure to gold, ended the quarter up 5.5%.