Global equities sold off sharply on the week as COVID-19 (coronavirus) headlines accelerated and became more dire. The S&P 500 was down 12.4% on the week while small caps fell more than 17%. Emerging markets fared better with losses of 8.8%. Despite an epic rally in Treasury yields, the Barclays Aggregate Bond Index was down 0.5% as corporate bond spreads widened significantly. As of this morning, S&P 500 futures were pointing to additional losses of about 5%. Overnight saw some real selling that resembled historically well-known bear markets. Thailand was down 10% and India was down 8%. European banks have fallen 40% in less than a month.

Headlines are becoming impossible to keep up with. The latest includes a travel ban from President Trump to continental Europe for 30 days. The NBA has suspended the season as players have tested positive for COVID-19. The NCAA will play games with no fans. The entire U.S. service sector is facing an abrupt halt that looks to be unmatched in recent memory. It is becoming more apparent that a recession is inevitable, but the duration of the virus spread remains the wild card that will move markets going forward. The other obvious factor is how extreme and how quickly the Federal Reserve will increase their balance sheet and engage in further asset purchases. This appears to be what the market wants and the Fed meeting next week will likely prove pivotal in whether we see a temporary bottom.

The Dow Jones Industrial Average, which dates back to the 19th century, had it fastest 20% drawdown from a market peak in its history. It took less than 20 days to reach the classic definition of a bear market. It has been hypothesized the higher, and growing, use of exchange-traded funds would lead to speedier selloffs, as there are fewer active managers to support the market via buying on weakness. This does appear to have turned into reality. The other key data point is bond yields across the curve hit record lows.

As markets face sharp selloffs, it will cause some securities to do better and some to do worse. Therefore, with a market down 20% it is inevitable some securities will be down 40% or more. This is a basic fact of every sharp market drawdown. What is relevant is the management of portfolios, as each security serves a purpose in reaching the appropriate risk-reward target. This should help alleviate the human instinct of concern or stress over the worst-performing securities.

Contributed by | Justin Carley, CFA, Managing Director

Justin is a Managing Director, providing portfolio management and credit analysis for fixed income strategies. He also manages the firm’s multi-manager portfolio strategies and contributes to the asset allocation framework. Justin has more than 10 years of experience focusing on management, analysis and trading of fixed income portfolios. Previously, Justin was a fixed income portfolio manager at American Trust & Savings Bank. Justin has a bachelor’s degree from Truman State University, holds the Chartered Financial Analyst designation and holds a Fellowship in the Life Insurance Management Institute.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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