The first quarter of 2020 was one for the record books. According to Reuters, Q1 2020's nearly 20% decline in the S&P 500 represented the biggest quarterly decline for US markets since 2008 and the worst first quarter since 1938. The statistics were even worse overseas with Europe registering its worst quarter since 2002, down nearly 23%; and stocks in the UK having their worst quarter since 1982. The only bright-side for equity investors was the fact that it could have been worse. Equities bounced 10-15% off their lows in the week prior to the quarter's end. The energy market fared even worse with West Texas Intermediate (WTI) crude falling over 65% in the quarter. Bonds were the sole bright spot in the quarter with the Bloomberg Barclays US Aggregate index rising roughly 3% as interest rates on the 10-year Treasury Note dropped from 1.92% to 0.68%.
The main culprit for all the damage to global economies and stock markets was COVID-19, the pandemic that began in China in January and quickly moved its way around the world. In this low visibility environment, our investment team remains humble about what we don’t know, and flexible in our positioning, revising our forecasts as new information comes in. First and foremost, we recognize that this is a health crisis, and thus we believe true resolution for stock markets may require some sort of health solution, not just stimulus from policymakers to offset the deep economic turndown. Following the very sharp declines since the peak just one month ago, we believe current levels of both risk assets (stocks and corporate bonds) and safer assets (Treasury bonds) reflect a fair amount of bad news. Two out of three of our tactical rules are positive as the Fed and central banks around the world continue to signal, they 'will do what it takes', and sentiment is at levels that are conducive to adding equity risk. However, the severity of the damage and the now negative trend-line for equities indicates that there may be further downside
Thus, while we still expect stocks will be higher than current levels 12-18 months from now, short-term risk remains high enough to keep our cautious positioning. All Riverfront Advantage portfolios have taken various levels of de-risking action over the past couple of weeks, as per our risk management discipline. We are now underweight stocks and overweight cash relative to our benchmarks, and meaningfully underweight international stocks in particular. The degree to which we have taken defensive measures in our balanced portfolios varies with their mandate and targeted timeframe. Our shorter investment horizon portfolios (5-7 years and shorter) are positioned most cautiously. Selection is another important aspect of our positioning. All our portfolios have a strong preference for US stocks over other developed markets. In simple terms, we believe that while the US’ efforts so far to manage the public health crisis are no better, the US track record of dealing with economic crises since the 1980s has been significantly better than Europe or Japan. This applies to both policymakers and businesses. US companies dominate the successful 21st century business models that we believe will weather the current situation better and come out stronger. These businesses have revenue streams that will be less impacted by the stay-at-home recession and workforces that can work remotely more easily.