I Heard Something About a Virus - T&T Quarterly Market Update - Q1 2020
by Thomas Quinn on Apr 8, 2020
Reading Time: c.6 mins
We’ve all absorbed a lot of news over the last 8 weeks. This email will not mention our thoughts on the pandemic, the flattening of the curve, ventilators or a shortage of PPE. Instead over the next 10 minutes of your life we will cover:
The Quarter by Numbers – In a quarter where virus data was sparse, we’ll focus on the numbers that we do know.
Suspending Time – Life, businesses and markets are suspended in time, all backed by your Government and Central Bank.
Bond Yields <1% - What does that mean for your portfolio?
Before we begin, a lot of articles over the last week have started with headlines to the effect that the recession caused by this virus will be ‘worse than the Great Depression’. We believe this is significantly different than the Great Depression for several reasons. Most of all because we expect a conclusion - a vaccine will be made available. This gives us an end in sight - likely 18 to 24 months - whereas with the Great Depression no visible end or reversal to the norms was known and it sunk prosperity for almost 10 years (1929-1938).
The Quarter by Numbers
As the questions changed over the quarter from ‘when will this bull market end?’, to ‘will Covid-19 cause a recession?’, to ‘how deep and long will this recession be?’, we have seen asset classes responding.
All asset classes were down. Global bonds fared best, down 0.3%, developed markets -20.9%, emerging markets -23.6%, global real estate investment trusts -30.2% and commodities -23.3%. Gold has gained 5% year to date, but oil has driven down the price of commodities as a whole.*
Closer to home, the S&P 500 was down 19.6%, Japan fared best out of the world stock markets at -17.5% and the UK was hit hardest -25.1%, as the index holds a lot of oil companies.
We also saw a sharp rise in the dollar, mostly spurred by the sheer panic and flock to safety dynamic of the markets, as the question in the last couple of weeks turned to ‘how deep and long will this recession be?’. We’ll likely see many governments printing more money over this period, some more than others, causing a yo-yoing of currency prices during this time.
What will be interesting to monitor is the economic data out of China, including certain key metrics such as car sales, which were down 80% in China’s peak month of February. This is an accurate data point to get a feel for the economic rebound. This may be used as a gauge for the US recovery and we may see yet more volatility as a result.
Central banks around the globe have thrown the kitchen sink at fighting the economic hardship of COVID-19. The focus has been on households this time around with the US government sending checks of up to $1,200 to individuals, plus $500 per child. The unemployed benefit has also been lifted by $600 a week until July 31st – maybe an indicator of when the US government intends normality to resume.
Across the pond in the UK, Boris Johnson’s policy is to also increase benefits but keep employees in work through a furloughing system. This policy of keeping as many people in ‘employment’ is aimed to kickstart the economy in quicker fashion when Brits resurface from their shutdown in late Spring / early Summer.
The economic packages in the US extend to businesses as well, with small and medium enterprises getting access to some of the $376 billion CARES Act relief package including loan advances, paycheck protection forgivable loans, bridge loans and debt relief.
We see similar type packages being announced globally, and this is not exclusive to developed markets. Billions of dollars in currency is being printed by most countries affected by this pandemic, however developed markets have far deeper pockets and can sustain this much further into 2020.
These extraordinary stimulus efforts have been welcomed by almost everyone. They have stemmed the outflows of investors from the markets, enabled employees to still put dinner on the table, allowed businesses to cover immediate short terms loses and kept millions in work.
Our lives might feel like they are on hold - with no holidays, no dinners out, and no time spent with extended family or friends - however that is the design of these policies. The objective is to suspend companies, markets and economies in a warped COVID-19 state - alive, but on life support - for when antivirals arrive and the healthcare system is through this critical stage (when it risks being overwhelmed as we isolate to try to "flatten the curve").
Over the remainder of 2020 we will see more of these packages to support businesses and households, but there will come a point when the government’s coffers run out. But for now we remain on hold, pending the flattening of the curve in order to save the healthcare infrastructure from being completely overwhelmed.
Bond Yields <1%
In 1981 the 10-year Treasury bond hit 15.2%, and since then we’ve seen bond yields fall to a now record breaking low of 0.6%, with the US 30-year Treasury dipping below 1% for the first time ever – that is the US government promising to pay you 1% per year on your money when you lock it away for 30 years!!
What this means for you is that some of the bonds in your portfolio have gone up in value because yields on new bonds have fallen. If the US Treasury issued a bond in December 2018 for 3%, and now a 10-year bond yields 0.6%, the bond you purchased in December 2018 is worth significantly more meaning the bond prices in your portfolio have risen. Good news, right?
Well, for investors: yes. Over the last few years, in a world of slow economic growth and falling bond yields, portfolios were benefiting from bond price increases even as equity was relatively stable. Looking back, it’s been a relatively easy ride over the last 6-7 years.
And, also for investors: no, it’s not good news. Falling yields means it is harder for your money to keep up with inflation, it is harder to generate a stable income and it is much harder to find protection from the volatility of equities in in an asset that can at least keep pace with inflation.
Bond yields at this level give more reason to investing more of your portfolio in equities. If you get 0.6% p.a. on a 10 year Treasury, which means you’re losing money each year because inflation is higher than 0.6%, then you don't have much choice but to hold equities (if you are seeking a real rate of return).
Please note we are not necessarily suggesting a 100% equity portfolio, or even a change to your equity exposure. However, rock bottom bond yields makes generating low volatility, consistent, long term growth even more of an uphill battle.
The news cycle will likely get worse - the economic fallout of GDP dropping, unemployment rising and companies filing for bankruptcy will happen. However, your money and the market might be on the road to recovery as we discover more "knowns" around this virus.
Such "knowns" include: the reinfection rate; how many people have the virus; how many have had the virus; what antivirals work; the bounce back after the shutdown in other countries etc. We’ll find this information out over the coming months and if there’s one thing markets love, it’s "knowns"
Clear, unambiguous data - and we’ll soon have a lot more of that!
If you want to reach out to us about your portfolio and/or your investments then please reach us on +1 646 201 4865 / firstname.lastname@example.org.
Stay safe, be well and stay indoors!
*Source: Global Agg: Barclays Global Aggregate, FTSE NAREIT Global Real Estate Investment Trusts, Bloomberg Commodity Index, MSCI World, MSCI Emerging Markets
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