Market Commentary – First Quarter 2020

The first quarter of 2020 started on a positive note with easing of trade tensions between the United States and China and geopolitical tensions between U.S. and Iran, but ultimately will be remembered for generations for the COVID-19 pandemic, the economic impact of government responses globally, and the record speed in which it negatively impacted capital markets.

Adding further stress to a global economy awash in U.S. dollar debt, there was a mid-March spike in the U.S. dollar and an oil price war between Saudi Arabia and Russia, which pushed oil prices down over 66% and wreaked havoc in the energy sector. Extraordinary actions were required by central banks to prevent catastrophic ripple effects throughout the economy, and for the first time, central banks started to directly fund government spending.

Around the world, short-term lending rates – which had never “normalized” from rate cutting in response to the 2008 Global Financial Crisis – were slashed again, and asset purchase programs returned in full force. Unlike 2008, however, fiscal authorities enacted large-scale stimulus packages to help support households and businesses. In Canada, Parliament approved direct spending via wage subsidies and tax credits, and liquidity measures to ensure the flow of credit.

In the fixed income markets, sovereign debt held in best during a brief spike in longer-term interest rates and sudden concern with less liquid and less viable debt. As such, corporate bonds and even Canadian provincial bonds performed poorly. Within the UBC Faculty Pension Plan, our bond managers were still dealing with segment-specific illiquidity at the quarter’s end, despite historic – and projected – central bank direct support of the bond markets.

The broad Canadian bond market returned 1.56%, but this masked intra-quarter volatility and weakness in corporate credits – the FTSE Canada Corporate Bond Index fell 2.48% for the quarter.

The Canadian stock market dropped precipitously, with the S&P/TSX Composite Index losing just over 20% of its value in three months. Not surprisingly, the economically sensitive industries were among the hardest hit; Energy, Materials, Financials, and Consumer Discretionary businesses sold off significantly. Companies in more defensive industries – Utilities and Consumer Staples – fared better, as did the gold miners, which followed the price of gold higher as a reaction to the crisis and the long-term outlook from inflationary money supply growth.

Supported by the U.S. $2 trillion stimulus plan and programs designed to ease upward pressure on the U.S. dollar, as well as the G20’s pledge of injecting $5 trillion into the global economy, the global equity markets realized historic gains towards the end of March. Still, as of month end, the broad American market (S&P 500) had declined by approximately 19% from December 31st and approximately 22% from its February peak. Technology and communications stocks performed best, a continuation of a lengthy trend that had the stock of five companies – Facebook, Apple, Amazon, Alphabet, and Microsoft – reach almost 25% of total market capitalization.

To pick but two European data points, Italian equities dropped 32% from their February highs, and the stock market of the Eurozone’s bellwether, Germany, declined by over 26% from its peak.

For Canadians investing south of the border, returns were improved by a strengthening greenback, which appreciated by approximately 8% versus the loonie by the quarter’s end. In Canadian dollar terms, the S&P 500 Composite posted a negative 12.2% return.

With the calendar flipping to May, the S&P 500 had declined only 12% year-to-date (-4.32% if translated into Canadian dollars). During April, equity markets staged a historic – and some would say improbable – rally; headlines flashed “best week since 1974 for the S&P 500” and “best week for the Dow since 1938”. However, these headlines were oddly juxtaposed against staggering unemployment numbers and depression-era GDP forecasts. At one point, a Charles Schwab survey of 18 financial firms revealed 2nd quarter U.S. economic growth estimates that ranged between -9% and -40% . Uncertainty abounds, and only with the passage of time will we understand the true human and financial cost of the events of the first quarter of 2020.