The beginning of the year feels like so long ago that it may be hard to remember investors entered January with a sense of optimism. The US and China had made real progress in resolving trade disputes and many hoped that we had seen an end to “headline-driven” market movements, at least for a little while. Then of course, the virus termed COVID-19 hit, and everything changed. People were urged to stay home, and major gatherings were postponed or canceled entirely. The world came to a veritable standstill.
All major stock indices saw sharp selloffs in the quarter, and volatility came back in a big way, with daily market movements in the high single digits becoming exhaustingly routine. As the world closely tracks the spread of the virus and its effect on the population, investors are trying to predict how companies will be affected. While stomach-wrenching in the moment, we see that stock markets are working as they are supposed to, quickly reacting to changing expectations.
Large cap US companies were the most resilient of the major stock indices, while simultaneously posting their worst quarterly return since the Global Financial Crisis. Smaller companies, which generally have fewer resources to endure such a slowdown in consumer demand, sold off over 30%.
Stocks overseas, in developed and emerging countries alike, declined slightly more than the broad US stock market. The US dollar strengthened in the first quarter, detracting from returns for US based investors.
Growth outperformed value in both the US and overseas once again this quarter. The Fed’s lowering of their interest rate to effectively 0% and the supply war between Saudi Arabia and Russia, which saw the price of oil fall 55% in March alone, have hurt companies in the financials and energy sectors, two relatively large components of many value indices. Saudi Arabia and Russia announced an agreement in principal to end the conflict on April 9.
In fixed income, US investment grade bonds were up modestly while municipals were essentially flat for the quarter. Fear over the impending economic shutdown led many investors to sell, and fund managers had to act quickly to meet redemption requests. The combination of manager’s needs to sell and a lack of buyers in the market created significant price distortions, with bonds sold at a steep discount to their fair value. The US Federal Reserve and other central banks intervened in a big way, providing liquidity and stabilizing the high-quality bond markets, which rallied through the last two weeks in March. In terms of lower credit rating sectors, high yield and emerging markets bonds each fell more than 10% as concern mounted.
While projections about COVID spread appear to be improving, there is great uncertainty around the course of the virus and how long it will take before life can “get back to normal.” An equally challenging prospect is anticipating how the global economy will recover once we get there. Will it be a quick jump back to where we were before? After all, there were no fundamental concerns with consumers, no bubble waiting to burst, instead we are simply staying at home, doing our part to flatten the curve. Answers to these questions will become clear over time. In the meantime, we continue to manage portfolios with an eye to harvesting tax losses where possible and rebalancing to asset allocation targets reflecting long-term objectives, thereby positioning clients for participation in the recovery, whenever it occurs.
 Fred Imbert et all, “Stock market live Tuesday: Dow drops 410 points, down 23% in 2020, Worst first quarter ever”, CNBC, March 31, 2020.
 Benoit Faucon, “Oil-Price War Batters Poorer OPEC Members as Coronavirus Looms, Wall Street Journal, March 31, 2020.
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The volatilities of any comparative indices included in this presentation may be materially different from the individual performance attained by a specific client in a Team Hewins strategy. In addition, client holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison to the performances of certain well-known and widely recognized indices. The indices are unmanaged, include reinvestment of dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Indices cannot be invested in directly. Set forth below are descriptions of the indices included in the presentation.
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Dow Jones Industrial Average Index: measures the performance of 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
Russell 3000 Index (U.S. Stock Market): measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. These securities are traded on the NYSE, NYSE MKT, and NASDAQ.
S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 23 emerging countries around the world.
Bloomberg Barclays US Aggregate Bond Index (U.S. Bond Market or Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds or US Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.
JPM EMBI GD Index: J.P. Morgan Emerging Markets Bond Global Diversified Index (EMBI Global Diversified) tracks the returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi- sovereign entities: Brady bonds, loans, Eurobonds. The index limits the exposure of some of the larger countries.