U.S. equities ended the first quarter of 2020 with the worst quarterly performance ever. The S&P 500 lost 20 % while the Dow was down 23.2% the somewhat resilient NASDAQ finished down 14.18%
What is causing this precipitous drop? Not the economic data, at least not yet. Economic data of late has been less bad than expected but is largely worthless information; the worst is yet to come. Even the typically optimistic President Trump stated, on the last day of the quarter, said that April will be tough and adherence to social distancing guidelines is “a matter of life & death”. What is really causing the drop is simply the unknown. No one can really predict how many folks will contract the Covid-19 virus, how many cases will be fatal, and economically speaking how devastating this will be to the world’s economies.
Many companies are in danger of not surviving without government aid: Carnival Cruise Lines, Delta Air Lines, United Airlines, many hotel chains and casino chains, the list goes on and on. There has been a proposal floated in New York to forgo and forgive rent, mortgage payments, and other loans. All dandy but will put much pressure on the banks, the companies that ultimately stand behind these individuals and businesses. Ultimately the government will be asked to save the banks, which is what they did not do in the Great Depression. The questions is how much strain can the U. S. Government withstand, especially given that as this situation gained momentum, the U. S. Government deficit was the greatest in history.
A quick look at 90 mutual funds in the Morningstar data base that previously all ranked in the top quartile of their respective sectors shows that only 3 had positive returns for the quarter. This list of 90 funds are managed by folks who, over the past 3 – 5 years, have proven to be the best in the business, yet they all lost money with some losing as much as 44% in the first quarter.
A combination of fear, despair, ETF trading, and algorithms caused the terrific ups and downs during the month March? . When folks can click a button to sell the ETF representing the S&P 500 while in the Whataburger drive thru, they sell good companies along with bad, every stock is hurt. With enough of selling the algorithms kick in and the machines begin to sell everything. All this creates unnecessary volatility.
Adding to the problem is the Saudi and Russia oil war. We’ve seen oil wars before, they are ugly and companies go out of business. We have never seen an oil war in the face of a worldwide pandemic and economic shutdown. This is going to get uglier before it gets better.
To end on a positive note, we have seen quite a few U.S. companies step up to offer help. We have seen Tesla, Ford, GM, and now Dyson step up to make ventilators. We have seen CEO’s of companies such as Disney, General Electric, Comcast, and many more, forgo their salary in an effort to keep employees on payroll. Locally Frost Bank donated $2 million to San Antonio to help charities, HEB donated $3 million and there are many more examples of folks stepping up to do what they can. The worst of times can bring out the best in people.
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