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Crash to end 1st quarter foretells volatility, uncertainty to come

Matt Kelley

Matt Kelley

Looking back at major events over the last three months feels as if we are looking at a decade’s worth of news. With all that has happened in the first three months of the year, the spreading global coronavirus pandemic and resulting bear market/recession have taken center stage.

What follows is an overview of what we have experienced economically over the last quarter, with a majority of the activity happening in March as the pandemic spread.

Consumer spending, usually around 70% of GDP, was able to keep our economy growing last year amid trade uncertainty. The consumer is now the face of this global pandemic and the resulting economic hardship. In an effort to slow the spread of COVID-19, governments around the world have canceled public events, mandated the closure of businesses and issued stay-at-home orders to citizens. This will result in an unprecedented demand shock to economic activity, the effects of which are truly unknown.

We saw the start of historic unemployment numbers in March. Unemployment claims are sure to continue as unemployment agencies have been overwhelmed, and contract workers will soon be able to file (under the CARES act). One of the most pessimistic unemployment pictures has come out of the St. Louis Fed, whose analysis resulted in an unemployment rate of 32.1 percent, with an estimated 47 million American jobs at risk.

While quarterly industry economic data continues to come in, it is clear that economic activity has plunged. TSA checkpoint travel numbers on March 31 were down more than 90 percent from the same weekday a year earlier, signaling an almost-complete wipeout of airline revenue. U.S. heavy truck sales and light vehicle sales are down 43 percent and 32 percent year-over-year, respectively. Mortgage applications have fallen 33 percent compared to a year ago. These are just a few examples; the list goes on. Looking at GDP forecasts from multiple investment banks gives us insight into how hard it is to predict the economic outcome of this pandemic. According to Doubleline, an investment management firm, GDP forecasts for the 2nd quarter range from -7 percent to -30 percent GDP, depending on the bank.

The Fed has shown its willingness to throw everything at the pandemic, including two emergency rate cuts on March 3 and March 15, and commitments to inject $1.5 trillion for bank funding via the repo market, as well as $700 billion in treasury and mortgage-backed purchases. Additionally, the Fed announced multiple facilities to provide liquidity or funding for the primary and secondary markets in asset-backed securities, commercial mortgage-backed securities, municipal bonds, corporate bonds, and others.

A $2.3 trillion stimulus package was signed into law on March 27. Included in the bill are direct $1,200 payments to individuals. There is also $349 billion in emergency funding provided to bolster the Small Business Administration. The purpose is to provide small business with funds necessary to navigate the crisis. What’s important to note is all loan payments will be deferred for six months, and the SBA will forgive loan proceeds used to cover the first eight weeks of payroll costs, rent, utilities and mortgage interest. This could reduce the need to seek new employment for many workers, by keeping employers and employees linked, helping to accelerate future economic recovery once government mandated shutdowns end. While this will be more than welcome by those who are materially affected by the economic fallout of the pandemic, the concern will be how long it can last if government-mandated shutdowns continue longer than anticipated. There are already talks that another phase of the CARES Act may be necessary. Regardless, the goal here is to reduce not only the depth of the economic drawdown, but the duration as well.

Equity Markets

The stock market began pricing in the impending economic impact of the coronavirus in late February. As an economic recession became more probable, stocks crashed in the quickest descent into a bear market in history. March also made history by becoming the most volatile month on record, according to Bespoke Investment Group, with average daily moves of the S&P over 4.8 percent (up or down). To put that in perspective, the average daily move during the most recent bull market (since March 2009) was a mere 0.7 percent.

All U.S. sectors showed negative returns during the quarter, but some held up better than others. Energy was the worst performer, down about 50 percent as measured by XLE (S&P 500 Energy Sector ETF). Technology was the best-performing sector, down “only” 12 percent, with other consumer staples like health care and utilities down 13 percent. International equity markets dropped around 23 percent during the quarter.

Bond Markets

Treasury yields fell dramatically in an extremely volatile month once it became clear that the Fed was going to need to cut rates. The 10-year yield fell from 1.92 percent to a historic low of 0.32 percent before ending the quarter at 0.70 percent. Credit spreads spiked dramatically during the quarter as investors fear that an economic contraction could bring many companies to default.


The coronavirus took its toll on alternative investments as well, causing a dramatic drop in demand for many key commodities: from crude oil and industrial metals to agricultural commodities. The Bloomberg Commodity index is down 23 percent this quarter.

It was the perfect storm for oil this quarter. As demand fell off a cliff due to the economic slowdown caused by the coronavirus, we also witnessed the breakdown of OPEC+, when Saudi Arabia and Russia entered into an all-out price war. Prices of oil plummeted to the lowest price in 25 years. This has devastated oil companies and shale producers in the U.S. whose break-even points for oil production are much higher. Many oil producers around the world will be unable to operate for long with prices this low, however it is still unclear how long the COVID-19 crises will continue to hamper demand.

The real estate sector has been hit hard in the first quarter. The MSCI US REIT index, which tracks a diversified group of US Real Estate Investment Trusts, is down 28 percent. The hardest-hit sectors were retail, malls, and hospitality; REITs in these sectors fell over 50percent, as social distancing efforts eliminated most traffic to stores and hotels. It is hard to predict how long the economic freeze will last and how long it will take businesses to return to normal operations once it is over.


We will most likely have continued market volatility until there is clarity around the severity and duration of the spreading pandemic. Bottom line, the market has never bottomed on good news, so try to get comfortable with the fact that this cannot be timed perfectly and that there will be more volatility ahead.

Matt Kelley is a Portfolio Strategy Manager with ESL Federal Credit Union. In his role, Matt oversees ESL’s portfolio strategy team and is responsible for the investment philosophy, approach, and overall performance of ESL’s internal and external investment portfolios.

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