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March 2020 Monthly Review

  • March 2020 will be remembered as one of the most historic months in US history for the global pandemic, and the impact it had on global markets as the United States has become the new epicenter for COVID-19.  We wish your families the best during this dark moment in our country.
  • The past month will go down as the worst in risk markets since the crash in 1987, and due to the widespread catalyst, no sector or asset class has escaped without heightened volatility. 
    • Equity markets are fully entrenched in a “bear” market. From the end of February until March 23rd, the S&P 500 Index was down over 21%. From March 23rd through month end, the S&P 500 Index did manage to rebound 14%, but the Index ended the first quarter of the year down -18.27%.
    • Outsized downward market moves were swift and market volatility was extreme throughout the month. Large moves in the stock market triggered “circuit breakers” four times in March, which halted trading on the exchanges momentarily in hopes to allow things to settle down a bit.
  • By the end of the month, bond markets were somewhat spared, but not without a stressful intra-month period. 
    • Demand for “risk-free” assets skyrocketed which pushed a large portion of the treasury bill market to trade with negative yields. 
    • Risk premium spreads rose to historic heights in some markets. 
    • Liquidity disappeared not only from high beta bond markets (high yield, EM debt), but also from some of the most conservative sectors of the marketplace. Bid/ask spreads also became “socially distant”.  
  • Panicked markets were largely a result of rising death tolls and dire economic predictions. The bond market witnessed this in the form of forced selling, which drove yields to astronomical levels in many of the vehicles that traffic in bonds. Effectively, there were large margin calls on many leveraged funds, and they were forced to sell into a market when buyers were only seeking shelter.
    • Large bond ETF’s seemed to have liquidity issues, creating large discrepancies between stated fund “NAVs” and the values of their underlying holdings. 
    • “Risk-parity” funds had issues as asset class correlations sharply diverged. This may have caused wild swings in the TIP’s market.
    • REIT structures that invest in government-backed and non-government backed mortgage securities using leverage to enhance yields, also cratered. 
  • Municipal bonds were not immune. The thought that many municipalities would not be solvent in a deep extended recession panicked investors (the majority of which are individuals in the highest tax brackets). Many muni bond holders sought to raise liquidity by selling “safe assets”.  Even the high-quality VRDN (variable-rate demand note) market along with other “cash-like” investments saw unusually high yield levels.
  • Money market fund reallocations drove down short-term government bond yields to zero and beyond, as instruments like commercial paper bank time deposits were now deemed quite risky to investors seeking preservation of principal.
  • As the economy all but shut down, “green shoots” from the Federal Reserve Bank and the US government emerged to provide support of liquidity and the multiple facets of the economy that are impacted by this black swan occurrence.
  • As the COVID-19 situation and the impact of its spread unfolded, the Federal Reserve Board jumped into action by:
    • Lowering interest rates by 100 basis points, bringing the US back to a zero interest rate policy (0-25 basis point target range).
    • Adding daily liquidity to the treasury market as bid/ask spreads became as wide as the 1960’s in treasury notes and bonds.
    • Flooding the “repo” market to ensure orderly pricing in the financing market.
    • Agreeing to an open-ended quantitative easing (QE) that would buy government bonds, mortgage bonds, as well as asset-backed securities.
    • Back-stopping commercial paper facilities, and shortly after, providing a back-stop to the money market fund industry in general.  
    • Announcing new tools which includes the ability to outright purchase municipal bonds, corporate bonds, and even take equity stakes in “highly effected” companies (with the help of Congress).
  • Even as Fed action began to filter through to the liquidity of the bond market, volatility continued in equity markets. Main Street and equity markets needed fiscal stimulus from the government, and Congress came in with stimulus of its own.
    • On March 27th, US Congress signed the CARES Act (Coronavirus Aid, Relief, and Economic Security Act.) A 2.1 trillion-dollar package which included support for individuals and businesses. The initial release of this package provided market support as the bill received    bi-partisan approval and passage. 
  • From an economic standpoint, the country got a first look at how powerful the forced shutdown of a country could be. On April 4th, weekly jobless claims came in at 6.6 million, doubling the 3.3 million jobless claims data published on March 26th. These are all-time records and are likely to stay elevated in the coming weeks, shattering the 200,000+ average data point series.

The Piton team continues to focus on constructing quality portfolios that will perform over the long term with a lower standard deviation than many relative funds, ETF’s and fixed income strategies.

Last month and the first quarter of 2020, many investors were reminded of the pitfalls of “chasing yield” and not owning fixed income assets outright. Even the safest bond sectors can experience long periods of volatility.

Piton’s mission continues to be to protect investors and to manage fixed income portfolios with the general thought of “safety first”.  Risk taken in other facets of one’s investment portfolio (business risk, real estate, public and private equity) often creates the need for every investor, both individual or institutional, to have a high grade, actively managed, “cornerstone” bond allocation managed by a highly experienced team. Whether it be core cash, or a bond allocation that fills out an overall asset allocation, we truly believe our solutions are differentiated from the typical fixed income products sold to the masses. Unfortunately, it is in times like these that the market proves out the lessons we’ve learned over our long careers.

As always, please let us know how we may be of further service to you and your clients.