Before a big fight, reporters would always ask Mike Tyson what he thought would happen. The writers always wanted insight on the boxing style of his opponent and asked him to speculate about other guy’s lateral moves, how he danced, whether Tyson expected him to do this or do that, and how he would react. The youngest heavyweight champion in the world liked to talk and he always had a quote for the story. But once he cut the questions off altogether. “Look”, he said flatly, “Everybody has a plan until they get punched in the mouth.”
The man nicknamed Iron Mike and Kid Dynamite had quite a bit to talk about. By the time he was 46, he had racked up 50 wins and 6 losses, defended his title nine times, spent hard time in prison, declared bankruptcy, battled addictions, tried to make a comeback, lost his mother to a stroke and a 4 year-old daughter to a tragic accident. He labeled himself an annihilator and literally changed the game for fans, promoters and boxers worldwide. Back in the day, Mike Tyson was considered the epitome of pain and savagery by many and he left a wide path of fear and broken bones in his wake. This is generally how investors in the financial markets will look upon March of 2020.
The first three rounds of the new decade came to an end on Tuesday. But this is the United States of America and we have by no means suffered a knockout. Not even close. Nevertheless, all of our coronavirus related fears, national containment policies, raging oil battles, and expectations for global recession carry forward into April. And, now that our national shutdown has been extended, we know they will be with us through what we call the cruelest month into May.
Most of us who are not on the front lines of research, medical care, law enforcement, emergency services, national defense — and even the fourth estate trying to report on all of the aforementioned — are still adjusting to the stay-at-home orders and working around employer and school routines and demands, continuing to digest the daily White House Task Force briefings and announcements from state and local officials, closely following the progress of family, friends and neighbors in quarantine or hospitals, shaking our heads at the savagery of the pandemic, and sharing our bucket lists for all the life-affirming things we plan to do as soon as we are loosed from our studio apartments, man caves, and shared kitchen workstations. Case counts increase as expanded testing provides confirmation of the COVID-19 spread as a result of gatherings held a mere fortnight ago.
Governments around the world are taking unprecedented actions to restrict the movements of its citizens as well as those seeking to cross its borders, and this is greatly affecting supply chains, jobs, businesses and the greatest component of our economy: personal consumption. Schools across the globe are closed, factories are being repurposed from autos and whiskey to ventilator and hand sanitizer production, hotels and dormitories are being eyeballed as intensive care recovery sites, the National Guard is being mobilized to build mobile medical facilities, massive hospital ships have been sent to Los Angeles and Manhattan, and the Congress is looking at a fourth massive emergency funding bill. Trillions in direct assistance to households as well as grants and loans to airlines, railroads, and other businesses and needs are en route. And the financial markets respond to the aid, and talk of more aid, with temporary relief rallies that last until uncertainty and need surface again.
We are officially told that, despite all of our precautions and sacrifices, things will get worse in the weeks ahead, peaking in mid-month for some regions, later in others. Our glorious spring and holy days are about to be darkened by jobless claims, lost earnings, more shuttered businesses, widespread illness, and loss. But — optimists and patriots all — we power through these days, cheering for the doctors and nurses and scientists and manufacturers unbelievably hard at work, awaiting their lifesaving treatments, vaccines, protective devices, and cures while we are being advised to prepare, mentally as well as financially, not only for the bad numbers ahead, but for a recurrence and downturn in the fall. We are in between rounds right now, with the loud bells from February and March still ringing in our ears. There is a brief time out before the next bouts begin and volatility has dropped from the 50-year high set on March 16, when the Fear Index spiked to 82.69, topping the most recent high of 80.86 on November 20, 2008 and far from its half century average at 19.25.
U.S. stocks in general just suffered their worst quarter since 2008. For the Dow and S&P 500, they experienced the worst March since the Great Depression. Since January 1, the Dow Industrials Index has fallen 23%, the S&P 500, 20%; the Nasdaq, 14%; and the Russell 2000, best reflecting many of our smaller businesses, down 31%. For a number of reasons, crude oil is down an astonishing 67% this quarter, and gold is up 5%. Baa-rated corporate bonds maturing in 10 years gained 90 basis points to finish March at 4.60% and the major U.S. corporate bond indices suffered losses of 4.05% in 1Q2020. The world’s safe haven, U.S. Treasuries, however, stood strong, produced returns of nearly 9%. The 2-year government yield fell 133 basis points to 0.23%, the 10-year dropped 124 basis points to 0.67% and the 30-year shed 104 basis points to close the quarter at 1.34%. Just one year ago the long bond yielded 2.81%.
In March, municipals had their worst week ever. Investors trying to raise cash and meet margin calls, and institutions unwinding highly leveraged wagers, flooded the market with sell orders at fire sale prices will no distinction made between credits. Liquidity in a market seen as a haven second only Treasuries virtually dried up. During the week of March 18, total par volume sold peaked at $63.5B, the highest since the record selloff in mid-September of 2008. One week later, munis had the biggest price rally in history, a reversal that left traders breathless and investors relieved. By the time all the dust settled on Tuesday, the 2-year AAA municipal general obligation benchmark yield at 1.06% had gained only 2 basis points on the year and was 43 basis points below where it stood only one year ago. The 10-year muni yield fell 11 basis points to 1.33% during the quarter and was 53 basis points below the comparable 2019 level. The 30-year tax-exempt benchmark at 1.99% was 10 basis points below its 2020 starting point and 61 basis points stronger than where it was one year ago. After record-setting outflows in municipal bond mutual funds and with a primary calendar at a virtual standstill, municipal returns fell 3.75% in March. Despite the hottest start to the year on record, muni gains were reversed and major indices ended down 0.68% on the quarter.
Those who lived through the Great Recession know that the challenges we face now are decidedly different today, as are the threats to, and demands asked of, our citizens. Few, if any, comparables exist; some point to the Spanish Flu era and the two world wars for reference points. This pandemic is being viewed as a war different from the ones we once declared on poverty, on drugs, and on terror. It is being fought on two fronts, the one on disease protection and the other on economic protection. Public health officials and central banks have become the generals on the field, endeavoring to assure citizens that health care and financial systems are sound. The Federal Reserve and counterparts around the world have taken steps never before seen to provide for short term funding needs. The Fed acted with lightning speed to slash interest rates to zero, lower the rate that it charges banks for overnight loans, and began purchasing $700 billion of U.S. government and mortgage-backed securities. It relaxed the requirements for deposits that banks must hold as reserves to meet cash demand and increase lending, and is buying billions of U.S Treasuries from foreign sources in need of U.S. dollars. To stabilize a market short of buyers, the Fed is even now stepping in to buy investment grade corporate bonds and will soon start purchasing municipal bonds in the secondary market to ensure liquidity in markets that have never before required such support. All in all, it has been quite an action-packed 90 days for those who generally deal in more contemplative pursuits.
HJ Sims would like to let you know that we stand along with you, your families, your small businesses, employees and families during these challenging times. We encourage you to reach out if we can be of assistance directly or in referring you to other resources that may offer meaningful support. In the meantime, we invite conversations about your banking and financial needs, changes in your risk tolerance, interests, and goals. Over the course of our 85 years in the business, we have worked to attract an amazing array of talent that is available to serve you, our partners. In extraordinary times like these, we learn together, grow together, support each other, and celebrate our many day to day successes, small and large.