The first quarter was marked by one of the fastest market declines in history. As we wrote in our January market update, we were anticipating volatility to return to the markets, but we weren’t anticipating anything like what transpired.
From a high of 3393.52 on February 19, to the low of 2191.86 on March 23, the S&P 500 fell over 35% in a little more than a month’s time. While stock market declines like these can be unnerving, as a financial advisor the more concerning issue during the decline was the impact the market turmoil had on the bond market. For example, the exchange traded fund (ETF) AGG fell from 119.27 to 105.56 in nine trading days. The drop of nearly 11.5% has largely been recovered, but as we rely on bonds to be a stabilizing influence for portfolios that kind of volatility rattled even the most tenured professionals in the market. Treasury bonds also experienced historically high volatility at times during the quarter, so there were very few options to escape volatility altogether. The attached chart shows the unprecedented volatility in the 7-10yr Treasury Bond ETF. While these moves in the bond market were worrisome, even the more volatile ETF AGG ended the quarter in positive territory. The S&P 500 ended the quarter down 20%.
Our core asset allocation portfolios that may own bonds (Models 0 – 3) benefited from an increase in exposure to the bond market in early January 2020 and a subsequent reduction in exposure in late February. We normally would not consider doing adjustments such as these in such a short span of time in long-term models, but we were expecting a rise in bond prices and they reached the expected targets very quickly due to the flight to safety in the early stages of the coronavirus response. All of the core asset allocation models (Models 0-4) continued to benefit from our holdings in gold, which finished the quarter up 3.8%.
Looking forward, the solution to the financial market turmoil is to get the economy reopened. There are no certainties yet as to when that will happen, but when it does our expectation is that economic recovery will begin quickly. In our opinion, certain areas of the economy will respond more readily than others. Due to federal reserve actions the financial sector may be slower to get back on track. Materials and industrials would be expected to respond more favorably as production ramps back up.
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 https://www.investing.com/indices/us-spx-500-historical-data - February 1, 2020 thru March 31, 2020
 https://www.investing.com/etfs/ishares-barclays-agg-historical-data - March 9, 2020 – March 19, 2020
 https://www.investing.com/etfs/ishares-barclays-agg-historical-data - January 1, 2020 – March 31,2020
 https://www.investing.com/indices/us-spx-500-historical-data - January 1, 2020 – March 31, 2020