It would be an understatement to say that the U.S. economy has never seen a quarter quite like the 1st quarter of 2020. 

The stock market posted one of its worst quarters in history, oil prices plunged by more than 60%, and the yield on 10-year U.S. Treasuries dropped to an all-time low. Gross domestic product (GDP) is projected to sink deep into negative territory after years of steady growth. And weekly unemployment claims spiked to more than 6 million – a jump of about 3,000%.

But while the numbers paint a dire picture, a little perspective may be in order.

As daunting as the economic and market impact of the COVID-19 pandemic may seem, the long-term picture may be far different. While we don’t know how long the pandemic will last, nor what the full extent of the economic fall-out will be, the general consensus is that at some point in the future, shops and restaurants will reopen, ballgames will be played, theaters and resorts will resume operations, streets will bustle with traffic, children will laugh, friends will gather, workers will return to their jobs, and business-as-usual will recommence. 

From a historical perspective, although the 20% decline of the S&P 500® was one of the worst quarterly declines in history, it was relatively modest compared with the two worst bear markets of the past two decades.  During the tech stock crash of 2000-2002, the S&P 500 dropped by about 50%, and during the Great Recession downturn of 2007-2009, the S&P 500 dropped nearly 60%. 

In both cases, the market made a full recovery after bottoming out. After the tech crash hit bottom in 2002, the market rebounded by about 100% to its peak in 2007. After hitting bottom again in 2009, the market rebounded over the next decade by more than 400% before giving way to the COVID-19 crisis. 

Near the end of March this year, as Congress hammered out a $2 trillion stimulus package, the S&P 500 posted its largest weekly gain in more than a decade, reflecting confidence on Wall Street that the economy and the markets will eventually return to normal. 

But with 1st quarter earnings season nearly upon us, the mixed bag of upcoming corporate earnings reports will likely foster further volatility. If you’re a long-term investor, you need to be prepared to absorb some short-term shock waves in order to stay true to your long-term objectives. As Warren Buffet once observed, “We don’t have to be smarter than the rest, we just have to be more disciplined.”

Drilling down

U.S. stocks sink

The S&P 500 was down 20.00% for the quarter, from 3230.78 at the end of 2019 to 2584.55 at the end of March. It was down 12.51% for the month of March. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The total return of the S&P 500 (including dividends) was -19.60% for the quarter, and -12.35% for the month of March.

The NASDAQ Index was down 14.18% for the 1st quarter and down 10.12% for the month of March. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales fall 

Retail sales dropped 0.5% from the previous month in February, according to the Department of Commerce report on March 17. But those sales numbers were expected to take a much steeper drop in March as the effects of the widespread retail lockdown swept the nation. 

Unemployment claims spiral

With massive layoffs across the entire food, hospitality, retail, and service industries, unemployment claims skyrocketed by about 3,000% in March, according to the U.S. Department of Labor (DOL).

After averaging about 215,000 unemployment claims per week over the past 12 months, total claims soared to 3.28 million in the week ending on March 21, and more doubled the next week to 6.65 million claims. That is a trend that may continue in future weeks as more businesses across the country temporarily close their doors.

Sectors drop across the board

All 11 sectors of the S&P 500 suffered significant losses for the past month and the 1st quarter. So widespread were the declines that the only stock in the Dow Jones Industrial Average1 that posted a gain was Microsoft – up just one penny for the quarter.

The worst sectors were Energy, down 50.45% for the quarter, as oil prices tumbled, and Financials, down 31.92%, as bond yields sunk to historic lows. The best performing sector was Information Technology, down 11.93%, led by Citrix Systems (CTXS), a digital work space and network leader, up 27.25% for the quarter, and Nvidia (NVDA), a leader in online gaming graphics processing chips, up 11.22%.

The chart below shows the results of the 11 sectors for the past month and 1st quarter: 

Treasury yields keep falling 

The declining yield on 10-year U.S. Treasuries continued to set new all-time lows in March. After closing February at 1.14% – the lowest yield since the government began offering bonds in 1790 – the yield continued its freefall in March, closing the quarter at just 0.68%. 

The drop was attributed to two key factors: an increase in bond demand as investors sought a safe haven amid the market turbulence and the corrective action taken by the Federal Reserve (Fed). The Fed made two rate cuts in March, the first on March 3, as it sliced rates by 0.5% to a range between 1% and 1.25%, and again on March 16 when it cut the rate a full percent to a range of 0% to 0.25% – the lowest rate in history. The cuts were made to reduce the cost of loans for banks and their customers and provide adequate access to credit during the economic downturn.

Corporate earnings on the decline

Corporate earnings growth is expected to decline sharply in the coming months amidst the impact of COVID-19 slow-down. Earnings are expected to be severely impaired across a wide swath of industries, such as oil, retail, sports and entertainment, food and hospitality, autos, airlines, and banks.

As stock prices dropped, so did the forward S&P 500 price-earnings ratio (P/E) – from 18.17 at the close of 2019 to 15.43 at the end of the 1st quarter. However, the P/E could move back up if earnings projections continue to fall.

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the quarter at 6.60%, up from 5.50% at the end of 2019. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The yield remains significantly higher than the 0.68% rate of 10-year U.S. Treasuries.

Dollar gains versus Euro but drops versus Yen

The Euro dropped 2.25% versus the dollar in the 1st quarter, as the pandemic affected economies across the globe. While the dollar fared well against the Euro, it edged down 0.66% versus the Yen in the 1st quarter. 

Oil prices hit 18-year low

Oil prices dropped to the lowest level since 2002, as global travel slowed to a crawl. The dive in oil prices was exacerbated by a hike in production by Saudi Arabia, which has been locked in a price war with Russia. In its worst quarter and worst month on record, West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped 66.46% for the quarter and 54.24% for the month, closing March at just $20.48 per barrel. It began the year at $61.06 per barrel. 

Gold prices climb

As the financial markets tumbled, gold prices edged up 4.83% for the quarter. After closing 2019 at $1,523.10 per ounce, the price of gold rose to $1,598.30 at the end of March. 

International equities take a fall

Much like the U.S. market, the global stock market was also severely impacted by the economic effects of the coronavirus. The MSCI EAFE Index, which tracks developed-economy stocks in Europe, Asia and Australia, was down 13.82% for the month of March and down 23.43% for the 1st quarter.

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Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com