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The first quarter of 2020 marked an unprecedented period in U.S. financial market history across numerous dimensions. The unexpected emergence of a novel coronavirus spreading rapidly throughout the world caused world governments to implement extreme actions which included shutting down large portions of the global economy. Air travel, sporting events, group meetings, physical store retailing and cruising were dramatically reduced or completely outlawed by most countries in short order.
Anticipating the rapid decline in activity, the U.S. stock market fell into a 20% bear market in the shortest time ever, just 22 days and then continued to slide further, dropping 30% in a record 30 days. High dividend-paying stocks were not exempt from plunging risk markets as investors sold assets indiscriminately. Economists now anticipate a steep global recession with U.S. gross domestic product declining ten percent or more in the second quarter before recovering substantially prior to year-end.
As markets plunged, short-term expectations of stock market volatility, as measured by the VIX index, also known as the “fear index” reached an all-time high in its 30-year history on March 16. And the market’s actual realized volatility has only been higher in October 1987 (Black Monday) and the late 1920s. At the same time, oil prices experienced their biggest one-day drop since the 1991 Gulf War, plunging 25% on March 9, triggered by a price war between Saudi Arabia and Russia.
In addition to the sharp decline in global equities, we also saw a severe reaction in the credit markets. Over the period, investment grade bonds, preferred stock, hybrid securities and high yielding bonds fell in price as credit spreads widened.
While no one could have anticipated the pandemic sell off, we had already been in the process of bolstering the portfolio by systematically improving the quality of our securities positions and generally being more selective. For example, we found very little to like in the $25 par bond space over the past several months. However, with prices now down at significantly lower levels we are beginning to see very attractive valuations for long term investors.
As I write this commentary, markets have already begun to recover from the March 23rd low and volatility as measured by the VIX or “fear” index has declined from a high of 82 to well below 50. As markets continue to stabilize and the pandemic becomes more contained, we see a brighter future ahead.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
