Economic Update — Reviewing Q1 2020
The first quarter of 2020 was one for the record books.
Major indices set all-time-highs in mid-February and extended an already historic bull market into 2020 before the spread of COVID-19 sent equity markets into a nosedive. Since then, investors have seen some of the best and worst single days in market history as investors consider both positive and concerning developments.
We’ve also seen record unemployment claims, crude oil futures trading at negative prices and the VIX touched a record-high 85.5, well above its lifetime average level of 19.3. It’s never easy to predict the markets, but Q1 2020 has been something entirely new and investors are desperate for answers.
Below is a selection of insights from YCharts’ Q1 2020 Economic Summary Deck. The presentation, published quarterly, arms advisors and investors with the data and insights they need to digest the last quarter of action and make smarter investment decisions looking forward.
If you’re looking for even more insights, we reviewed the deck in full on our recent webinar: Reviewing A Turbulent Q1 2020: Market insights in a customizable, client-friendly slide deck.
YCharts users can find the full deck in the Support Center.
Quarterly Asset Class Performance
The table below shows performance for each asset class over the last 12 calendar quarters, with green cells showing relative outperformance and red showing relative underperformance in a given quarter.
With only two fixed income asset classes posting gains on the quarter, there weren’t many good places for investors to hide. Commodities sold off a gut-wrenching 42% as the Saudi-Russian oil price war pumped supply into the market and demand simultaneously fell due to COVID-19 travel restrictions.
The table illustrates the importance of diversification, as no single asset class has managed to outperform consistently over the last three years.
Diversification’s Impact on Returns
This is exactly what a well-diversified investor would like to see when volatility is high. The correlation between these major equity and fixed income averages has continued to move negative since mid-Q1.
So how has the power of diversification looked in practice? The next chart uses three standard, allocation-based portfolios — Conservative (purple), Balanced (orange), and Aggressive (blue) — to illustrate.
Portfolios with conservative (20% equities, 80% fixed income) and balanced (50% equities, 50% fixed income) allocations held up relatively well to increased volatility. Aggressively allocated portfolios (80% equities, 20% fixed income) drew down 25% but that shortfall has narrowed during the recent broad market rally.
Volatility Hits Bonds in A Good Way
Not all volatility is bad for returns.
Bonds broke way out of their normal volatility ranges in Q1 2020 while also appreciating in price. As such, investors with exposure to fixed income have significantly limited their downside as equities fell sharply. Should interest rates return to more normal ranges, however, bond prices could move lower in a hurry as older issues are traded down to offer similar yields as newer issues.
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