PPG Insights

Quarter 1 2020 Market Overview

My Dear Friends,

First and foremost, we hope this letter finds you, your family and loved ones healthy and safe. To say that these are unprecedented times is to describe the indescribable. We have never seen anything quite like this in our life time. In the United States of America, we are so accustomed to the incredible freedoms we enjoy. We come and go as we please. We enjoy the company of family, friends and neighbors. We like to congregate. We are trusting of each other. We are optimistic about the future. We are Americans.

Market volatility surged in the first quarter to levels last seen more than a decade ago, as the COVID-19 pandemic swept the globe. In sharp contrast to the relatively calm market environment of 2019, the new year started with a geopolitical shock when the United States executed a tactical strike that resulted in the death the second most powerful person in Iran.

In mid-January, China and the U.S. signed the “Phase One” trade deal providing needed clarity to the markets. Fundamentals for the economy and the stock market were very strong.

But, starting February 20th, market volatility rose sharply as coronavirus cases increased. The S&P 500 tumbled more than 25% from the mid-February highs to the late-March lows, amid rising fears that “social distancing” measures being implemented globally to stop the spread of the disease, would have a broad and substantially negative economic impact.

Positively, the U.S. government has acted promptly to support the economy:

  • The Federal Reserve cut interest rates to zero percent
  • Important measures were implemented to provide short-term cash for corporations and ensure plenty of capital for the broader banking system
  • Multiple economic relief bills were passed, the largest of which was a $2.2 trillion stimulus package
  • The variety of provisions in the CARES Act 2020 bill are pretty overwhelming. One specific provision that will affect many of us was an elimination of the Required Minimum Distribution (RMD) for tax year 2020. We are digging deeply into this and will report shortly on exactly what this will mean but essentially RMD requirements are waived for tax year 2020

Stocks reacted positively by rallying sharply during the last week of March, although the major averages still finished the first quarter with large declines.

Touching on market specifics:

  • Major U.S. stock indices all dropped sharply but the tech-heavy Nasdaq relatively outperformed the other three major indices due to large-cap tech companies
  • Large caps outperformed small caps
  • All 11 S&P 500 sectors finished the first quarter with negative returns
  • Foreign markets also declined with foreign developed markets slightly outperforming emerging markets
  • Commodities endured a historic collapse
  • In the fixed income markets the total return for most bond classes was positive while corporate bonds saw substantially negative returns

As we begin the second quarter of 2020, it’s fair to say investors and markets are facing a level of uncertainty that we have not seen in over a decade. But it is also true that the government has acted in a historically forceful way to support the economy and foster growth once the coronavirus pandemic has passed, and despite a volatile quarter, that is a comfort as we move forward.

Remember that this unprecedented market volatility, along with these societal disruptions, are temporary. We have been assured repeatedly that the spread of the virus will peak and then begin to recede. The timing of this process will vary from place to place. I have no doubt that the U.S. economy, which is by far the most flexible and resilient in the world, will recover. I believe that recovery will come sooner than previously thought thanks to the actions by the U.S. government over the past few weeks. We will be greatly assisted by the strength of our economy when all of these events began to unfold.

Although no one could foresee this virus or the impact it would have on the markets and the economy, events such as this are why we have spent time with you designing a long-term, balanced financial plan.

Through this difficult, but ultimately temporary disruption, that plan is designed to help you achieve your personal long-term financial goals. Meanwhile, shares of some of the most-profitable, well-run companies in the world are now trading at substantial discounts to levels at the beginning of the year, and history has shown us that over the longer term, these tumultuous episodes can create fantastic investment opportunities, and some of the most ideal buying conditions the market can offer. Am I suggesting that you pour all of your extra cash into the stock market right now? No. Of course not. We are still aware of the potential for further volatility but I firmly believe that we will see stock prices and more importantly the economy, recover.

It’s ok to be afraid. It’s ok to be nervous. There is a silly old joke that says, “If you can keep your head in all of this chaos, you obviously don’t understand the situation.” Trust me when I tell you that I get it. I truly do. And I cannot wait for the day which I believe will come pretty soon, when we see the curves level off and healing begins.

Thank you for your trust in us. Please don’t hesitate to call. Most of us are working remotely. All of us are still here. And thank you as well for your kind words of encouragement to each of us.

Please remember to continue the important protocols that have been put in place to help our communities survive and recover as quickly as possible. Keep yourself and your loved ones as safe as possible.

May God bless us all.

Please see our more detailed quarterly market analysis of this overview below.

Quarter 1 2020 Market Analysis

Market volatility surged in the first quarter to levels last seen more than a decade ago during the financial crisis, as the COVID-19 pandemic swept the globe and prompted the partial shutdown of most major global economies, including the U.S., EU and most of Asia. But while the pandemic was the main cause of the historic volatility, we’ve witnessed over the past several weeks, the coronavirus outbreak was not the only source of volatility in the markets during the first quarter, as geopolitics and domestic political developments also impacted markets over the past three months.

In sharp contrast to the relatively calm market environment of 2019, the new year started with a geopolitical shock when, on January 3rd, the United States executed a tactical strike that resulted in the death of Iranian General Qasem Soleimani, whom many considered to be the second most powerful person in Iran. Tensions between the U.S. and Iran rose sharply as Iranian leaders promised retaliation, and stocks dropped on the news while oil rose as investors feared a potential regional war. Positively, the Iranian response, a small rocket attack on a U.S. base in Iraq, did not cause further escalation. Additionally, Iran mistakenly shot down a Ukrainian commercial airliner during the rocket attack, tragically killing all 176 people on board, and the global fallout from that all but ended the conflict. Ultimately the geopolitical crisis was short lived, but it proved to be a harbinger of what was to come later in the quarter.

As the geopolitical scare faded, investors’ focus turned back to the U.S.-China trade war, as both China and the U.S. signed the “Phase One” trade deal in mid-January. The agreement did not provide material tariff relief, however it did importantly signal no further tariff increases. As such, it provided needed clarity to global industrial companies and the markets. In response, stocks moved steadily higher, powered by the favorable combination of the U.S.-China trade “truce,” low interest rates following the rate cuts of 2019, historically low unemployment and steadily rising corporate earnings. Fundamentals for the economy and the stock market were very strong, and the S&P 500 hit several new, all-time highs between mid-January and mid-February.

But, starting February 20th, market volatility rose sharply as the number of active coronavirus cases began to dramatically accelerate in South Korea, Iran and Italy. The swift spike in new coronavirus cases outside of China resulted in a sharp drop in stocks in late February. Those declines were then compounded throughout March as the number of active coronavirus cases in the U.S. began to increase rapidly. The S&P 500 tumbled more than 25% from the mid-February highs to the late-March lows, amid rising fears that “social distancing” measures being implemented globally to stop the spread of the disease, would have a broad and substantially negative economic impact.

Positively, the U.S. government has acted to support the economy as the Federal Reserve cut interest rates to zero percent and implemented several important measures to provide short-term cash for corporations and ensure there’s plenty of capital for the broader banking system. Congress also passed multiple economic relief bills, the largest of which was a $2.2 trillion stimulus package aimed at providing support for businesses and displaced workers. Those actions are working to help keep the banking and financial systems functioning in an orderly manner as well as supporting the economy through this unprecedented shutdown. Stocks reacted to these positive events by rallying sharply during the last week of March, although the major averages still finished the first quarter with large declines.

As we begin the second quarter of 2020, it’s fair to say investors and markets are facing a level of uncertainty that we have not seen in over a decade. But it is also true that the government has acted in a historically forceful way to support the economy and foster growth once the coronavirus pandemic has passed, and despite a volatile quarter, that is a comfort as we move forward.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Past performance doesn’t guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome.

The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. You cannot directly invest in any index.

1st Quarter Market Performance Review

The major U.S. stock indices all dropped sharply in the first quarter on concerns about the economic fallout from the coronavirus pandemic. But, the tech-heavy Nasdaq relatively outperformed the other three major indices, thanks to large-cap tech companies being viewed as somewhat insulated from the economic fallout compared to many other industries. The S&P 500, Dow Jones Industrial Average and Russell 2000 (the small-cap index) all saw larger declines in the first quarter.

By market capitalization, large caps outperformed small caps in the first quarter, and that is what we’d expect when market declines are being driven by concerns about future economic growth, because large caps are historically less sensitive to slowing growth than small cap stocks. From an investment style standpoint, growth relatively outperformed value, yet again, due to strength in large-cap tech.

On a sector level, all 11 S&P 500 sectors finished the first quarter with negative returns. Traditionally defensive sectors, those that are less sensitive to changes in economic activity like utilities, consumer staples, and healthcare, relatively outperformed, which is historically typical in a down market. Technology shares also outperformed the S&P 500, again due to relative strength in large-cap tech companies as their businesses are thought to be more resilient than other parts of the market.

Conversely, cyclical sectors, those that are more sensitive to changes in economic activity, badly lagged the S&P 500 in the first quarter. Energy was, by far, the worst performing sector in the S&P 500, as it declined sharply due to plunging oil prices. Material and industrial stocks also underperformed on fears of reduced future earnings if there is a prolonged global economic slowdown.

US Equity Indexes

Q1 Return

YTD

S&P 500

-19.60%

-19.60%

DJ Industrial Average

-22.73%

-22.73%

NASDAQ 100

-10.29%

-10.29%

S&P MidCap 400

-29.80%

-29.80%

Russell 2000

-30.61%

-30.61%

Source: YCharts

Looking internationally, foreign markets also declined in the first quarter, and again underperformed the S&P 500. Foreign developed markets slightly outperformed emerging markets, although barely so, as the economic fallout from the coronavirus is thought to be widespread globally. Meanwhile, emerging markets lagged both foreign developed markets and the S&P 500, although emerging markets did benefit from a rebound in Chinese markets in March, as China was successful in containing the coronavirus and their economy began to re-start late in the first quarter.

International Equity Indexes

Q1 Return

YTD

MSCI EAFE TR USD (Foreign Developed)

-22.72%

-22.72%

MSCI EM TR USD (Emerging Markets)

-23.57%

-23.57%

MSCI ACWI Ex USA TR USD (Foreign Dev & EM)

-23.26%

-23.26%

Source: YCharts

Commodities endured a historic collapse in the first quarter driven by steep declines in industrial commodities such as oil and copper. Oil plunged to multi-decade lows over the past three months on a combination of potentially reduced demand stemming from the global economic shutdown paired with surging supply due to the global price war that broke out following the failed “OPEC+” meeting in early March. Ultimately, prices declined to levels not seen since the early 2000s in the final days of the quarter. Gold, meanwhile, rose slightly in the first quarter as investors sought protection from uncertainty, although gold was very volatile in the month of March.

Commodity Indexes

Q1 Return

YTD

S&P GSCI (Broad-Based Commodities)

-42.34%

-42.34%

S&P GSCI Crude Oil

-66.84%

-66.84%

GLD Gold Price

7.01%

7.01%

Source: YCharts

Switching to fixed income markets, the total return for most bond classes was positive in the first quarter, although corporate bonds saw steep declines over the past three months, which is not surprising given the potential economic fallout from the coronavirus pandemic. The leading benchmark for bonds, the Bloomberg Barclays US Aggregate Bond Index, experienced positive returns for the sixth straight quarter.

Looking deeper into the fixed income markets, longer-duration bonds outperformed those with shorter durations in the first quarter and that’s what we would expect to see when expectations for future economic growth are falling sharply.

Corporate bonds saw substantially negative returns in the first quarter as high-yield debt badly lagged investment-grade debt. The underperformance of lower-quality corporate bonds also underscored rising concerns about future economic growth, and more specifically, the health of many global corporations.

US Bond Indexes

Q1 Return

YTD

BBgBarc US Agg Bond

3.15%

3.15%

BBgBarc US T-Bill 1-3 Mon

0.47%

0.47%

ICE US T-Bond 7-10 Year

10.34%

10.34%

BBgBarc US MBS (Mortgage-backed)

2.82%

2.82%

BBgBarc Municipal

-0.63%

-0.63%

BBgBarc US Corporate Invest Grade

-3.63%

-3.63%

BBgBarc US Corporate High Yield

-12.68%

-12.68%

Source: YCharts

2nd Quarter Market Outlook

What a difference a quarter can make.

At the beginning of 2020, market fundamentals were arguably as positive as they had been in years. Interest rates were low, the labor market was historically strong, the U.S. and China achieved a potentially lasting truce in the long-standing trade war, and the global economy was showing signs of acceleration following a sluggish 2019.

But all that was upended by the coronavirus, which not only caused historic and unsettling volatility across global financial markets, but also upended normal society in a way none of us have ever seen before.

Across the nation, and the world, roads are mostly empty, office buildings are vacant, schools are closed and normal life as we have known it has largely ground to a halt.

Yet it’s important to point out that, as Fed Chair Powell stated in a recent interview, there was nothing “wrong” with our economy before the coronavirus hit. There was no tech stock bubble and no housing bubble, like we saw in the last two U.S. recessions. As mentioned, economic fundamentals were rather positive prior to this unprecedented shock, and that offers some comfort when we look at investing over a longer time horizon.

To that point, it is also important to remember that this unprecedented market volatility, along with these societal disruptions, are temporary. We believe at some point, the spread of the virus will peak and begin to recede.

Similarly, these social distancing measures, while unsettling, also are only temporary. Our children will once again return to school and adults will return to work. Air travel will resume, cruise ships will set sail again, and the U.S. economy, which is by far the most flexible and resilient in the world, will recover, and that recovery will come sooner than previously thought thanks to the actions by the U.S. government over the past few weeks.

Over the past month, we have all witnessed a degree of panic, both in regular society as well as in the financial markets. But as we all know, the worst thing to do during a panic...is to panic. That’s because panic leads to hasty, short-term decisions that jeopardize your long-term best interests.

Although no one could foresee this virus or the impact it would have on the markets and the economy, events such as this are why we have spent time with you designing a long-term, balanced financial plan. Over the years, many of you have heard me say repeatedly that we design portfolios for “when the really bad thing happens to our economy, not if

Through this difficult, but ultimately temporary disruption, that plan is designed to help you achieve your personal long-term financial goals. This is the “when.” Meanwhile, shares of some of the most-profitable, well-run companies in the world are now trading at substantial discounts to levels at the beginning of the year, and history has shown us that over the longer term, these tumultuous episodes can create fantastic investment opportunities, and some of the most ideal buying conditions the market can offer.

Past performance is not indicative of future results, but history has shown that a long-term approach combined with a well-designed and well-executed investment strategy can overcome periods of heightened volatility, market corrections, and even bear markets. I am reminded of events in 2008 - 2009. Markets were in shambles. The financial system seemed completely broken. But it survived. We survived... and we witnessed a recovery to our nation’s economic system over the next decade that some have called the strongest economy we have ever had. It gives me both comfort and encouragement to realize that this horrific pandemic fell upon us during a time of great economic strength. As a nation, we have been able to fight back. And our leaders, our citizens, our friends, neighbors and family have in very large numbers decided to take personal responsibility for social distancing and following protocols that will help to bring an end to this terrible nightmare.

At Professional Planning Group, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even intense volatility like we experienced in the first quarter is unlikely to alter a diversified approach set up to meet your long-term investment goals.

Therefore, it’s critical for you to stay invested, remain patient, and stick to your plan. We’ve worked with you to establish a personal allocation target based on your financial position, risk tolerance, and investment timeline. Therefore, we continue to take a diversified and disciplined approach with a clear focus on longer-term goals.

We understand that volatile markets are both unnerving and stressful, and we thank you for your ongoing confidence and trust. Rest assured that our entire team will remain dedicated to helping you successfully navigate this difficult market environment.

Please do not hesitate to contact us at any time with any questions or comments.

Finally, above all else, please be careful, follow the social distancing protocols and stay healthy.

May God bless us all.

Warmest regards,

Malcolm A. Makin, CFP®
President

Additional information, including management fees and expenses, is provided on Professional Planning Group’s Form ADV Part 2, available upon request or at the SEC’s public disclosure site, https://www.adviserinfo.sec.gov/Firm/108868. Past performance is not a guarantee of future results.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome.

You cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

MSCI EAFE (Net Div) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the United States & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. (Total Return Index) - With Net Dividends: Approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. MSCI Barra uses withholding tax rates applicable to Luxembourg holding companies, as Luxembourg applies the highest rates.

MSCI Emerging Markets (Net Div) is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of December,31, 2010, the MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI Total Return Index: Measures the price performance of markets with the income from constituent dividend payments. The MSCI Daily Total Return (DTR) Methodology reinvests an index constituent's dividends at the close of trading on the day the security is quoted ex-dividend (the ex-date). With Gross Dividends and With Net Dividends are the two variant calculations of MSCI Total Return Indices. The MSCI ACWI ex U.S. index is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets. The S&P GSCI is the first major investable commodity index. It is one of the most widely recognized benchmarks that is broad-based and production weighted to represent the global commodity market beta. The index is designed to be investable by including the most liquid commodity futures, and provides diversification with low correlations to other asset classes.

S&P GSCI ENERGY INDEX (TR) Provides exposure to the energy sector in the commodity asset class on a total return basis, and is a leading measure of energy price movements within the commodity markets. It provides investors with a publicly available benchmark for investment performance in the energy markets. The Index is calculated primarily on a world production-weighted basis and is comprised of the principal physical energy commodities that are the subject of active, liquid futures markets. The commodities reflected in the Index are represented in the Index by notional investments in commodity futures contracts and may change in the future in accordance with the rules of the Index. The S&P GSCI GOLD INDEX (TR) A sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future. The index is designed to be tradable, readily accessible to market participants, and cost efficient to implement. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

The Bloomberg Barclays Mortgage-backed Securities Index is a market value-weighted index which covers the mortgage-backed securities component of the Barclays U.S. Aggregate Bond Index. The index is composed of agency mortgage-backed passthrough securities of the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) with a minimum $150 million par amount outstanding and a weighted-average maturity of at least 1 year. The index includes reinvestment of income. The Bloomberg Barclays Municipal Bond Index is a measure of the long-term tax-exempt bond market with securities of investment grade (rated at least Baa by Moody's Investors Service and BBB by Standard and Poor's). This index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations.

The Bloomberg Barclays US CP High Yld Bond index covers all fixed rate, non-investment grade debt, including corporate (both US and non-US Industrial, Utility, and Finance), and non-corporate sectors. Also included, Canadian and Global Bonds-(SEC registered, and issuers in non-emerging market countries), original issue zeroes, step-up coupon structures, and 144-As. Exclusions are Pay-in-kind bonds, Eurobonds, debt issues from emerging market countries, structured notes with embedded swaps or other special features, private placements, and floating rate securities. Must be publicly issued, dollar denominated, non-convertible, rated high-yield or lower by at least two of the following: Moody's, S&P, or Fitch. Unrated bonds, although a small number, are included but must have previously held a high yield rating or been associated with a high yield issuer, and must trade accordingly. As well, there must be at least 1 year left to maturity, and an outstanding par value of at least $150 million. The Bloomberg Barclays U.S. Treasury 5-7 Year index measures the performance of the U.S. Government bond market and includes public obligations of the U.S. Treasury with a maturity of between five and up to (but not including) seven years. Certain special issues, such as state and local government series bonds (SLGs), TIPS and STRIPS are excluded.