What a ride!
What a way to start a decade. Our major concerns coming into the new year were what US-China trade conflict resolution would look like and the impact of the 2020 general elections. Those concerns pale in comparison to what has unfolded. The impact of COVID-19 has been immense. We have never seen such a single event-driven shock to the markets of this magnitude.
The S&P 500 Index declined by $6 trillion in value this quarter as the index saw its peak of 3,386.15 on February 19. A little over a month later, it reached levels not seen since December 2016 as it traded down over 30% to 2,237.40. And, as we all know, there is one singular reason for this decline: COVID-19. Some economists call this an event-driven downturn. Of course, this event exposes underlying weakness in some market structures, but we know this steep decline would not have happened without the virus. The index ended the quarter down 19.6%.
Domestic Sector Performance
One thing all S&P 500 sectors had in common this quarter was negative returns. The worst performing sector was energy. The base case was reduced demand for oil due to the virus. This was exacerbated by a price war between the Saudis and the Russians. The sector ended the quarter down over 50%. The second worst performing sector was Financials, as low interest rates led to margin pressure concerns. The sector was down 31.9% for the period. The most resilient sectors were Information Technology and Health Care with returns of -11.9% and -12.7%, respectively.
International Equity Performance
Surprisingly, China was one of the top performers in the MSCI All Country World ex USA Index. The country declined by only 10.2%. Our current overweight in International ADR strategy to China was a positive contributor to performance. The best performing country in the index was Denmark with a decline of 7.7%.
Emerging market countries were significantly impacted by the economic slowdown. Brazil was the worst performing country in the index with a negative return of 50.2%. Colombia and Greece rounded out the list of top three underperformers. The returns for the countries were -49.7% and -45.1%, respectively. Performance for international companies trailed United States performance at -23.3%.
How are we reacting to this new environment?
The virus is an anomaly. It is totally unexpected and unpredictable. The record 11-year bull run we saw is another anomaly. Downturns, on the other hand, are not anomalies. The heading to this section is a little misleading. We focus on not reacting to equity market movements; however, we prefer to act. The difference is discipline. Managers who are constantly reacting expose themselves to risks outside of strategy mandates. Reacting is the best way to miss out on potential return opportunities in the long-run.
We have been diligent in reviewing the balance sheets of our companies and their ability to meet obligations. We are consistent in the review of the underlying financials of our portfolio companies. Our discussions now are increasingly focused on what long-term opportunities are coming up in equity markets.
U.S equity markets have historically dominated any time they have been matched against a recession or downturn, even when it seems like we’ll never get back to previous levels. We don’t know specifically how long this dip is going to be. We don’t know how long it will take for recovery, but we definitely anticipate there will be a recovery.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.