Quarterly Market Commentary – Q1 2020

U.S. Stocks:

The U.S. stock market entered a bear market on February 14th. The S&P 500 Index declined 19.6% in Q1 due to a combination of negative catalysts, most of them stemming from the ongoing coronavirus pandemic. In times of crisis, almost all asset classes fall in tandem as investors seek perceived safe haven assets such as U.S. Treasuries, Gold, and the U.S. dollar. In Q1, the correlation of U.S. stocks spiked to 90% as measured by the Cboe implied-correlation gauge and all 11 industry sectors closed down by at least 10%. Information Technology stocks remained the most resilient, losing 11.9% for the quarter. Energy stocks declined 50%, as the oil price feud between Saudi Arabia and Russia roiled oil markets. The entertainment and hospitality industries were left the most exposed to government-imposed lockdowns. Publicly traded real estate trusts specializing in hotel and mall assets plunged 35% in the last two months. The Financial sector declined 31.7%, but interestingly, average bank loan exposure to hotels is low – around 1.4%. Despite all the negative headlines, the Dow Jones Industrial Average made a final push in the waning days of Q1, rising 21.3% between March 27 – March 31 and ushering in a new bull market. This surprising development further demonstrates the importance of staying the course and following a long-term, disciplined investment strategy.

Notable and Interesting Company Specific Headlines:
  • Spiking corporate debt: Companies have drawn at least $124bn from credit lines since March 1st. The largest credit line drawdowns in order were: General Motors ($16 billion), Ford ($15.4 billion), AB InBev ($9 billion), Kraft Heinz ($4 billion).
  • The fall of a Chinese coffee maker: Chinese coffee giant, Luckin Coffee plunged 81% on April 2nd after the company said its board was investigating reports that senior executives and employees fabricated transactions that amount to 2.2 billion yuan ($310 million). The coffee chain, founded in 2017, operated about 4,500 stores in China and has aimed to upset Starbucks’ dominance in the region.
  • The rise of Zoom Video: Teleconferencing upstart Zoom Video Communications reaped the benefits of a global workforce shifting to working from home. As most stocks plunged, Zoom stock doubled in a matter of weeks. Zoom’s rapid rise proved to be a double-edged sword as it exposed a plethora of privacy issues with the service. Elon Musk’s space exploration company, SpaceX, went as far as to ban Zoom video due to privacy issues.
  • Troubled aircraft maker: Boeing stock declined as much as 70% in Q1 as the company was hammered by the Boeing 737 Max crisis and the Covid-19 pandemic. Problems with the Boeing 737 Max took the lives of 346 people, cost the aircraft maker $18.7 billion to date, and shaved off 0.4% from 2020 U.S. GDP growth. Boeing is now offering buyout packages to its entire staff of 161,000 and weighing new output reductions as the Covid-19 pandemic threatens to depress aircraft sales for years.
  • In search of a vaccine: Drugmaker, Gilead Sciences, has ramped up production of its experimental coronavirus drug (remdesivir), which has seen overwhelming demand amid a surge in worldwide cases. Even though Gilead agreed to not charge for the vaccine, the company’s stock price gained 17.8% for the quarter.
Update on the Coronavirus Pandemic:

The number of confirmed coronavirus cases across the world topped 1.5 million as of April 8th, 2020. There have been 320,000 confirmed recoveries and 88,000 deaths. The United States is the most infected country based on officially reported numbers with 422,000 infected, 14,500 deceased, and 22,000 recovered cases. On a more positive note, European countries such as Italy, Spain, and Germany seem to have passed the peak for new daily infections.

The Institute for Health Metrics and Evaluation models show that the number of new U.S. cases could peak by mid-April. According to Gavekal and the University of Washington, “three-quarters of states will have passed peak ICU (intensive care unit) demand by April 27th, at which point they predict 200,000 Americans will be hospitalized, with over two thousand people dying per day. The White House expects up to 240,000 deaths in the United States. To put these numbers into perspective, the common flu killed 34,200 Americans in 2018 and 61,000 in 2017.

U.S. Macro-Economic News and Coronavirus Impact:

Every economic model expects that the historic 11-year U.S. economic expansion will come to an end in Q2 2020. Federal Reserve Chairman Jerome Powell acknowledged that the economy “may well be” in a recession, but also stated that “there is nothing fundamentally wrong with our economy”. The median estimate for Q2 GDP growth is -12%, but economists still remain hopeful that a sharp recovery will occur in Q4. Oxford Economics estimates that Q4 GDP growth will rebound to 14.5% and the economy will expand by 1.2% for the full year. As of March 31st 2020, these are the key economic milestones in America’s fight against the pandemic:

The 1% Market Move: 12/20/2018

1. Social distancing measures lead to business closures:

The most evident and quantifiable economic victims of the pandemic are in the retail, restaurant, entertainment, transportation, and hotel industries. According to the Bureau of Labor Statistics, these industries employ roughly 31 million of the American workforce (20% of all workers) and account for $4.1 trillion in consumer spending (19% of GDP). A Womply survey showed that roughly 50% of small businesses would not survive more than 3-months without sales. Companies have already started tapping their revolving credit lines at an unprecedented rate. The weekly change in business loan applications increased 5-fold to almost $200 billion.

2. Business closures lead to layoffs and unemployment:

In the last two weeks 10 million Americans filed for unemployment benefits. The March U.S. Non-Farm payroll number pointed to 700,000 lost jobs, which is the first job loss month in over 10 years. The unemployment rate jumped from 3.5% in February to 4.4% in March. As of March 31st, the median estimate for Q2 unemployment rate is around 7%.

3. Unemployment leads to American families strapped for cash:

The Consumer Confidence Index declined to 120 in March (vs. 132.6 in February). The percentage of consumers expecting business conditions will improve over the next six months decreased from 20.6% to 18.2%. According to a Morning Consult survey, 41% of adults don’t have enough savings to last 3 months if they lost a job. According to a YouGov survey, one in nine Americans say they cannot pay their rent or mortgage in April.

4. Monetary Stimulus from the Federal Reserve to add liquidity to financial markets:

The Federal Reserve pledged to “do whatever it takes” to keep the economy from collapsing under the weight of the coronavirus pandemic. The Federal Reserve slashed the federal funds rate from 1.75% to 0.25% and started a new quantitative easing (QE) program to pump liquidity into the financial market. Bloomberg estimates that this QE round can reach $3.3 trillion (The Fed used $1.7 trillion for a similar program during the Great Recession).

5. Fiscal Stimulus from the Federal Government to help consumers and businesses:

President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARE Act) on March 27th, 2020. The CARE Act is a $2.3 trillion (10.8% of GDP) stimulus package aimed at providing individuals and businesses with cash and loans to help them get through the period of social distancing and lockdowns.

J.P. Morgan Asset Management estimated that fiscal stimulus could increase the budget deficit from ~4.5% to 13.6% of GDP in 2020.

Oil News:

Oil prices were hit by both a supply and demand shock in the first quarter. On the demand side, the government-imposed lockdowns significantly decreased global demand for oil. On the supply side, Saudi Arabia and Russia couldn’t reach an agreement on necessary production cuts in order to offset the demand shock and maintain elevated oil prices. The feud has led to oil prices plunging as much as 55% in March, although prices temporarily jumped 40% in the last week of March on hopes that Saudi Arabia and Russia would continue negotiations on production cuts.

European Union:

According to Macrobond, roughly 10% of the Eurozone GDP is shut down and 50% disrupted due to the coronavirus pandemic. The rapid collapse in the Eurozone services sector has been unprecedented. The Markit Services PMI figure collapsed from 52 in February to 26.4 in March. (A figure above 50 represents an economic expansion, a figure below 50 represents a contraction.) The European Central Bank announced a new quantitative easing program that would add 750 billion euros of liquidity into the financial system.


On December 31st 2019, the first coronavirus case in the world was reported in Wuhan, China. The Chinese government instituted aggressive quarantine measures to contain the spread of the virus. Based on the WeBank China Economic Recovery Index, the containment measures briefly cut China’s economic activity to 30% in February. The government’s efforts proved successful as new infections peaked and plateaued around early February. As of March 31st, the same recovery index indicated that around 72% of China’s economy is back online. The Chinese Services PMI (Business Activity) recovered from 27 in February to 43 in March. The Manufacturing PMI tells a similar story with the index rebounding from 41 to 50 in the last two months. Overall, Bloomberg Economics estimates that China’s full year 2020 GDP growth will be 1.4% (pre-coronavirus forecast 5.2%).

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