In the first quarter, we transitioned out of a market that was largely quiet with small daily gains to one that is now characterized by volatility and uncertainty.1
Officially turning the longest-running bull market into bear territory, the novel coronavirus created rippling effects throughout the markets and economy, influencing everything from interest rates, to at-risk industries to consumer behavior and beyond.2
As we make our way into the second quarter, we continue to keep a very close eye on the three key themes that most influenced the first quarter.
1. Impact of the coronavirus: We know we enter the second quarter in a recession. Second-quarter gross domestic product (GDP) is expected to contract between 10% and 20%, levels we have not seen since the Great Depression.3 We also know that we will likely be hearing about more infections and deaths, and more unemployment and economic losses. Markets are also likely well-aware of this. Aiding the economy and markets will be deferred consumption in the third and fourth quarters and a Fed that has been much more proactive than it was in 2008 to 2009. The market awaits a more definitive timetable on a plan to move from virus control to economic recovery.
2. Political clarity: Though most of the volatility experienced thus far can be attributed to the global health pandemic, there is at least some level of political uncertainty with 2020 being an election year. The likely candidates are now known but this will play some role in market volatility and potential future policy as we near the election.
3. Interest rate contagion: We have read about zero or negative interest rates in Japan and Europe for years now. The U.S. had avoided this contagion but zero and negative rates have now hit our shores.4 This is a challenge for bond investors as they look for ways to earn a real return.
While this will pull expected returns of bonds even lower, which will have some effect on expected returns for planning purposes, it may open up opportunities for us as borrowers to refinance debts and lower our interest costs.5 We don’t expect rates to move higher quickly but will watch how the market reacts to the large amount of spending the U.S. has just undertaken.
The first quarter was a whirlwind. If you haven’t already, please connect with your advisor about revisiting your portfolio allocations.
1. Yahoo! Finance (data as of 4/1/20) – S&P 500
2. USA Today (3/11/20) – Dow drops into bear territory for the first time since the financial crisis, as investors fret over coronavirus
3. Marketplace (3/30/20) – How bad will this recession be, and how long will it last?
4. CNBC.com (3/15/20) – Dow drops nearly 3,000 points, as coronavirus collapse continues; worst day since ’87
5. Forbes (3/16/20) – Will the Fed’s sudden cut usher in even lower mortgage rates?
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971