Investment Key Takeaways—First Quarter 2020

April 3, 2020

We are living through an extraordinary period in history that none of us will ever forget. The impact on our families, communities, and country has been profound. The United States and world are now facing the dual threats of a health crisis and an economic crisis. Both need to be fought with monumental government policy responses and individual behavioral changes.

While the news may seem dark and hopeless at times, we will get through this crisis period. Things will improve and recover. This too shall pass. Most importantly, we sincerely hope you and yours are able to remain healthy and manage well through this challenging period.


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 fall 20%, having rebounded a bit from their historic drop. Smaller-cap U.S. stocks did even worse, falling 31%.

Developed international stocks and emerging-market stocks both dropped around 24%. 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 2.5% year to date.

In the fixed-income markets, core bonds gained over 3%, 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 ended the quarter at 0.70%, down from 1.92% at year-end.

Turning to the credit markets, floating-rate loans and high-yield bonds took it on the chin. Both dropped around 13%. But investment-grade corporate bonds were far from immune, having lost over 4%.


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, governments around the globe understand something massive needs to be done quickly on the fiscal policy side. On March 27, Congress passed, and the president signed into law, a $2 trillion stimulus package. Similar support measures are being debated or implemented around the world. Discussions continue about additional steps to take in support of markets and the economy.


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.


Litman Gregory maintains an active, up-to-date business continuity plan. We also have a business continuity team that meets twice weekly. They are actively monitoring the COVID-19 pandemic, making adjustments to the plan and providing regular updates to employees. As a result of our experience and preparation, we were well-prepared to maintain our client service and business operations during this complex and unusual period.

We recognize that everyone in our community is managing through new and unfamiliar circumstances. Please know that as a firm, we are committed to safeguarding the best interests of our clients and our client team and to supporting one another through this challenging time. We want to assure you that our team remains available and ready to offer support and assistance.

Read the full Investment Commentary.