Investment Key Takeaways—First Quarter 2020

March 26, 2020

Given the extraordinary market and economic environment we are in, we’ve accelerated the publication of Chief Investment Officer Jeremy DeGroot’s commentary and the key takeaways below. We wanted to share with you our most up-to-date investment thinking and market analysis. We encourage you to read the full commentary. The main message from our CIO this quarter is that, while the news may sound dark and hopeless at times, this too shall pass. The world has faced many challenges and economic downturns and has always come out the other side. We are all facing unique risks and unknowns today, but we will bet on our resilience.


All returns quoted here are as of the market close on March 24.

The first quarter of 2020 has been an unprecedented period in U.S. financial market history across numerous dimensions. We just witnessed the fastest 30% decline from a recent high on record for the S&P 500 (in only 30 days). We have experienced historic volatility: the CBOE VIX Index—often referred to as the market’s “fear index”—hit an all-time high of 82.69 on March 16. And we saw 10-year and 30-year Treasury yields fall to all-time lows on March 9.

Year to date, larger-cap U.S. stocks have fallen 24%, having rebounded a bit from their historic drop. Smaller-cap U.S. stocks have done even worse, falling 34%.

Developed international stocks have fallen 29%, and emerging-market stocks have dropped 27%. Much of the differential between U.S. and foreign stock market returns has been due to the appreciation of the U.S. dollar, which has risen roughly 4.5% year to date.

In the fixed-income markets, core bonds have gained just over 1%, once again providing their key role as portfolio ballast against sharp, shorter-term stock market declines. Yields have been extremely volatile as well—shooting up on some days when stocks were also sharply selling off. The 10-year yield is currently at 0.84%, down from 1.92% at year-end.

Turning to the credit markets, floating-rate loans and high-yield bonds have taken it on the chin. Both have dropped around 20%. But investment-grade corporate bonds have been far from immune, having lost over 7%.


The near-term economic damage from the United States’ and other countries’ response to the coronavirus outbreak now looks almost certain to be severe. GDP is expected to sharply contract, potentially by historic proportions, and unemployment is expected to rise to levels never seen before. The consensus agrees but appears to believe the recession will also be short in duration. However, a so-called V-shape recovery is by no means a sure thing. To the extent stock markets are not fully discounting a more severe economic outcome, stock prices could fall further.

The depth and duration of the recession (and the speed of the recovery) depends on the effectiveness of our medical and policy responses. A medical resolution is a “known unknown.” But the Federal Reserve and other major central banks seem to be all-in to support the fluid functioning of credit, lending, and financial markets, and their critical role as the “plumbing” of the real economy. At the same time, congressional Republicans, Democrats, and the Trump administration all seem to be in agreement that something massive needs to be done on the fiscal policy side and done quickly. As we write this, a $2 trillion–dollar stimulus package has passed the U.S. Senate and is headed to the House of Representatives for a vote later this week.


Portfolios this quarter will reflect the sharp short-term declines in global stock markets. Our allocations to lower-risk fixed-income and diversified alternative strategies have offset some of the equity losses. Treasuries and managed futures in particular have been areas of positive returns during the quarter. But even this level of diversification has not been able to completely counter a steep and quick equity downturn. Yet when stock prices—or any asset’s prices—drop, forward-looking returns rise. Our outlook for U.S. stock returns improved with their cheaper valuations. So, in mid-March we began taking advantage of this bear market by adding a small allocation back to U.S. stocks at better prices, reducing our previous underweight but still not reaching our full neutral allocation to equities.

As markets have dropped further, we have assessed the next point at which we’d want to add back another increment to U.S. stocks. Every day we incorporate new information into our analysis, but at the current time, we are looking to buy at a price level where our base-case five-year expected return for U.S. stocks is in line with or somewhat better than the long-term historical average return for stocks. We believe that is sufficient compensation to warrant a neutral or full strategic weight. And if stock markets fall further, we will move to an overweight to stocks overall once the odds of above-average returns are favorable.

Read the full Investment Commentary.