The violent, waterfall stock selloff of last quarter reached its lowest point on March 23. After that date markets began a sharp recovery, advancing strongly for the next ten weeks. By the end of May the S&P 500 had regained more than two-thirds of the ground it gave up between mid-February and the March low. The rebound reached its peak on June 8, after which news of a resurgence in Covid-19 infections broke the upward momentum. The advance took place against a backdrop of really terrible, but no longer surprising, news regarding claims for unemployment benefits and a sharp, general downturn in economic activity. Several factors may explain the disparity between the economic data and the market returns. Much of the earlier selloff likely involved forced selling by investors with various sorts of leveraged positions, which seems to have run its course by the last week of March. Second, while we know that the effects of the Covid-19 epidemic will be bad, the picture is starting to become a little clearer. Finally, massive monetary stimulus by the Federal Reserve and fiscal stimulus authorized by Congress have injected large sums into the economy. That stimulus has provided much-needed relief, and at least so far it has headed off the worst of the economic calamity that could have resulted from the sudden shutting down of so much of the economy. All that liquidity has also likely contributed to buoying asset prices. For the quarter, the S&P 500 returned +20.54%. The Mid-cap 400 index returned +24.07%, and the Small-cap 600 returned +21.94%. [Index returns: Standard and Poors]

International stocks also advanced. The MSCI EAFE international equity index returned +12.60% in local currencies. Exchange rates moves were muted, and mixed. The dollar edged higher to end June at 107.77 yen, from 107.53 at the end of March. The dollar ended June at $1.1237 to the euro, a bit weaker than its March 31 level of $1.1016. It strengthened a bit, to $1.2369 against the pound Sterling from its level of $1.2454 at the end of March. The overall currency move gave a modest boost to investors in overseas assets; EAFE returned +14.88% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Yields on US Treasury securities, already very low, fell a little further. The yield on the two-year Treasury fell to 0.16% at the end of June, from 0.23% three months earlier. The ten-year yield slipped to 0.66%, from 0.70%. Owing in part to significant liquidity support in the corporate bond market from the Fed, the Bloomberg Barclays US Aggregate bond index returned +2.90% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]

The stunning rebound in the US stock market from its bottom on March 23 continued for the first week of June, reaching its peak, at least for now, on June 8. The upward momentum broke when the market suffered a sharp, one-day drop as news emerged of significant increases in Covid-19 infections in a number of southern states. Unsettling as this drop was, it did not lead to another precipitous market selloff. While cautious investors expressed increasing concern that the ongoing epidemic could continue to act as a drag on economic activity, more bullish investors pointed to data indicating a surprisingly quick (if partial) recovery from the lockdown-driven economic downturn of March and April. Monetary support from the Federal Reserve and fiscal relief from Congress also helped stabilize the markets, and their trading showed no particular trend for the final three weeks of the month. For the full month the S&P 500 index returned +1.99%, the Mid-cap 400 index returned +1.26%, and the Small-cap 600 index returned +3.74%. [Index returns: Standard and Poors]

Global stocks continued to participate in the general recovery, and the MSCI Barra EAFE international equity index returned +2.64% in local currencies. The US dollar ended June unchanged, at 107.77 yen, from its level at the end of May. The dollar weakened against European currency, easing to $1.1237 against the euro and $1.2369 per pound Sterling, from May 31 levels of $1.1107 and $1.2320, respectively. The currency movement pushed the EAFE index’s US dollar return to +3.48%. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The Federal Reserve has continued to signal its intention of pursuing unusually accommodative monetary policy for the foreseeable future, and so interest rates remain extremely low. The yield on the two-year US Treasury note ended June at 0.16%, unchanged from its level of the end of May. The ten-year yield ended June at 0.66%, barely higher than its May 31 level of 0.65%. The Bloomberg Barclays US Aggregate bond index returned +0.63%, a surprisingly strong result given the very low rates and the lack of movement in Treasury yields. The reason for the gain in the Aggregate index is that it includes investment-grade corporate debt, which performed well on the strength of direct support in that market from the Fed. [Index returns: Bloomberg; Treasury yields: US Treasury]

The powerful market rebound that began in the last week in March and carried stocks higher throughout April continued during May. In February and March, bad news drove the market down, but what comparatively good news arrived provided little relief. Since the end of March, the situation has reversed, with good news sending the market sharply higher, while bad news seems to have had little effect. The market responded especially strongly to any indication, no matter how preliminary or speculative, of progress toward a therapy or vaccine for the novel coronavirus. The market’s strength seems at odds with the manifest weakness in the real economy, and the uncertain prospects for an early recovery. In my view, the explanation most likely lies with the massive stimulus that Congress and the Federal Reserve supplied in February and March in response to the shutdown of much of the economy. Credit support from the Fed and cash injections from the Treasury appear to have averted the worst of the economic calamity the emergency threatened, and much of the resulting liquidity appears to have found its way into asset prices. Whatever the reason, the S&P 500 index returned +4.76% for the month. The Mid-cap 400 index was even stronger, returning +7.31%, and the Small-cap 600 index returned +4.31%. [Index returns: Standard and Poors]

The stock market rebound was global in scope. The MSCI EAFE international equity index returned +4.06% for the month. Currency movements were modest during May; the dollar advanced to 107.77 yen at the end of the month, from 106.76 at the end of April, but it slipped to $1.1107 to the euro, from $1.0934 a month earlier. It firmed a bit, to $1.232, against the pound Sterling, from $1.2509 a month earlier. (The market conventions for quoting exchange rates make these figures a bit confusing. We conventionally quote the yen in terms of yen per dollar, so a higher quote – meaning it takes more yen to buy a dollar — denotes dollar strength. But we quote the euro and Sterling in terms of dollars per unit of the other currency, so a higher quote means it takes more dollars to buy euros or pounds, denoting dollar weakness.) The indistinct currency moves had only a small effect on dollar investors’ returns on overseas assets, and EAFE returned +4.35% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Interest rates, which had fallen sharply earlier in the year, moved only slightly. The yield on the two-year US Treasury note ended May at 0.16%, compared to 0.20% at the end of April. The 10-year yield ticked up to 0.65%, from 0.64%. The intervention of the Federal Reserve gave a strong lift to the corporate bond market, however, and so the Bloomberg Barclays US Aggregate Bond index returned +0.47% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

The violent, volatile waterfall selloff in US equity markets of last quarter reached its lowest point on March 23. After that date markets began a sharp recovery. The US market continued to advance strongly throughout April, and by the end of the month had regained about half the ground it gave up between mid-February and the March low. The advance took place against a backdrop of really terrible, but no longer surprising, news regarding claims for unemployment benefits and a sharp, general downturn of economic activity. Several factors may explain the disparity between the economic data and the market returns. Much of the earlier selloff most likely involved forced selling on the part of investors with various sorts of leveraged positions, a process that seems to have run its course by the last week of March. Second, while we know that the effects of the COVID-19 epidemic will be bad, the picture is starting to become a little clearer, and the frightening strain the health care system and the populace in New York City endured appears to be abating. It also appears to be a phenomenon local to New York. Finally, massive monetary stimulus by the Federal Reserve and fiscal stimulus authorized by Congress have injected large sums into the economy. That stimulus has provided much-needed relief, at least to some people, and at least so far it has headed off the worst of the economic calamity that could have resulted from the sudden shutting down of so much of the economy. All that liquidity has also likely contributed to buoying asset prices. For the month of April the S&P 500 returned an astonishing +12.82%. This time, smaller stocks also participated in the bounce. The Mid-cap 400 index returned +14.18%, and the Small-cap 600 index returned +12.70%. [Index returns: Standard and Poors.]

International markets also rallied, though not so strongly as those in the US. The MSCI EAFE international equity index returned +5.43% in local currencies. The global rush to the US dollar abated in April; the dollar eased to 106.94 yen from 107.53 on March 31, and to $1.2602 per pound Sterling, from $1.2454. The pandemic’s effects on the Continent kept pressure on the euro, and the dollar strengthened a bit, to $1.0934, from $1.1016 at the end of March, against that currency. Overall, the currency movements favored US investors in overseas assets, and EAFE returned +6.46% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Largely as a consequence of the Fed’s massive monetary easing, interest rates fell from levels that were already very low. The yield on the two-year US Treasury note slipped to 0.20% from 0.23% a month earlier. The ten-year yield ended the month at a yield of 0.64%, compared to 0.70% at the end of March. The Federal Open Market Committee met as scheduled in March, and announced afterward that, in effect, they do not plan to consider anything but the easiest possible monetary stance until the current public health emergency has passed. The Fed’s posture gave comfort to investors in corporate bonds, which had been a bit shaky in March. The Bloomberg Barclays US Aggregate Bond index returned +1.78% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

As difficult as it may be to remember, the market momentum of the end of 2019 continued for the first six weeks of 2020. After mid- February, however, the spread of the novel coronavirus and COVID-19, the associated respiratory ailment, took over the news and upended the markets. In the last week of February the US stock market fell by about –12%. As the epidemic became widespread and case counts began to rise rapidly, an increasing number of communities severely restricted mobility, and consequently business activity. This virus is new and its severity and virulence unknown, and the sudden interruption in economic activity has no recent precedent. The combination of negative news and uncertainty meant that startling volatility accompanied the vertiginous drop in stock prices, producing several single-day market moves in excess of five percent — up or down. On two occasions the market hit a “circuit-breaker” — a fifteen-minute pause in trading after the S&P 500 index falls by 7% from the previous day’s close — within a few minutes of opening. On March 23, the index fell to about the level at which it ended 2016, a drop of one-third from its February peak. It recovered somewhat in the final week of the quarter, but even after that bounce, the return of the S&P 500 for the quarter was –19.60%. The drop hit smaller stocks even harder: The Mid-cap 400 index returned –29.70%, and the Small-cap 600 returned –32.64%. In the last six weeks of the first quarter, the market gave up nearly its entire gain since the end of 2018. [Index returns: Standard and Poors]

International stocks kept pace, in a negative way, with their US counterparts. The MSCI EAFE international equity index returned –20.55% in local currencies. Exchange rates were volatile, but overall their changes were mixed. The dollar slipped to 107.53 yen at the end of March, from 108.67 three months earlier. The dollar ended March at $1.1016 to the euro, a bit stronger than its December 31 level of $1.1227. The dollar strengthened to $1.2454 against the pound Sterling, a fairly dramatic move from its level of $1.3269 at the end of February, as the effect of the pandemic on the UK seemed surprisingly severe. The overall currency move did not have much effect on investors in overseas assets; EAFE returned –22.83% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

As often happens in sharp market downdrafts, yields on US Treasury securities fell sharply, from already-low levels. The yield on the two-year Treasury fell to 0.23% at the end of March, from 1.58% three months earlier. The ten-year yield fell to 0.70%, from 1.92%. Even though corporate, and especially high-yield, bonds weakened in March, the Bloomberg Barclays US Aggregate bond index returned +3.15% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]

Friends,

After the extraordinary events of the past several weeks and the equally extraordinary market response, it seems appropriate to offer a few observations. Those of you in the Bay Area are experiencing, like us, the broad “shelter in place” order, which initially affected nearly 7 million people in six counties, and later expanded to three more. Those of you outside the Bay Area have likely read or seen news reports about the order. The need to stay close to home is inconvenient in some respects, but I perform the essential functions involved in managing client portfolios online in ordinary times, and so Tiemann Investment Advisors, LLC is fully functional while I am working at home. In addition, the order is not so draconian that I would not be able to go briefly to our office, which is just a mile and a half from our home, if necessary. I do ask that if you need to reach me by telephone while this order is in effect, currently announced to be until April 7, please call my mobile phone, 415-999-6030, rather than the office number. I will also check the voicemail on the office number regularly.

The disruption due to the novel coronavirus has manifested itself dramatically in the financial markets. Markets have been extremely volatile, with daily moves in excess of 5% (down or up) seeming to be the rule for the past three weeks. Last Thursday the market fell -10%, a daily percentage drop second only to the crash of October 19, 1987. Friday the market rose a similar amount. Then on Monday, the market fell -12%, eclipsing Thursday’s mark. Yesterday (Tuesday) the market rose again, and today it fell. The speed and sawtooth volatility of the market decline reflect a high degree of uncertainty regarding the evolution and economic consequences of the current public health emergency. The Dow Jones Industrial average closed today just about where it ended 2016.

Today for the first time professional investors seem to me to have shifted toward regarding the current market valuations as a buying opportunity. I remain cautious, but it’s encouraging to hear some voices counseling a constructive view. In any case, I’d counsel against panic selling. The underlying plumbing of the markets continues to function, and currently at least, signs are that the banking system continues to function as well. The Fed has also signaled its willingness to provide necessary liquidity to keep banking, financing and payment systems operating. Specifically, they have reduced their benchmark short-term interest rate to near zero and provided large facilities for providing liquidity to the banking system. Legislation offering some relief to firms and workers affected by social distancing shutdowns is also making its way through Congress.

In terms of public health, my general sense is that we will have some fairly large number of cases of COVID-19, including a number of severe cases large enough to strain, but not break, our healthcare system. We will also have too many fatalities. One important unknown, though, is whether all this unfolds over weeks or months. The necessary public health steps to date, including our own shelter-in-place order, will hopefully slow the virus, but they will certainly slow the US economy. It’s impossible for me to imagine that they will not trigger a recession. If they last for a short while and we can resume normal lives soon, then the economic disruption might be short-lived. But the longer we remain in this state, the greater the demand shock and the more people will find themselves out of work. That, in turn, could depress demand further, prolonging the recession.

My take is that the market has already priced the expectation of a recession, but probably not the worst-case, extended slowdown. That suggests that at these levels risks are actually pretty well balanced, but with an unusually wide range of possible outcomes. For investors not currently relying on your portfolios for current income, I wouldn’t recommend making radical portfolio changes. Investors in saving mode should be able to tolerate the risk of further downturns when investing fresh cash. For investors relying on fixed endowments, I have been reviewing, and will continue to review, risk exposures.

Please feel free to call if you have further questions or comments. Again, while I am working from home it’s best to call on my mobile, 415-999-6030, though I will also be checking my office voicemail. If you need to send physical documents, please let me know and we can make arrangements.

Best regards,

JT.

Jonathan Tiemann
President
Tiemann Investment Advisors, LLC
750 Menlo Avenue, Suite 300
Menlo Park, California 94025

The introduction and spread of the novel coronavirus and the associated respiratory illness took over the news, the markets, and really our lives during the month of March. As the epidemic became widespread and case counts began to rise rapidly, an increasing number of communities severely restricted mobility, and consequently business activity, in an effort to stall the spread of the virus. This virus is new and its severity and virulence unknown, and the sudden interruption in economic activity has no recent precedent. As a result, while we know that the effects of both will be bad, we do not know how bad. The combination of negative news and uncertainty triggered a vertiginous drop in stock prices, marked by startling volatility. March saw several single-day market moves in excess of five percent — up or down — and on two occasions the market hit a “circuit-breaker” – a rule requiring a fifteen-minute pause in trading after the S&P 500 index falls by 7% from the previous day’s close – within a few minutes of opening. At its lowest point in recent weeks, on March 23, the S&P 500 had fallen to about where it ended 2016. It recovered somewhat in the final week of the month, but even after that bounce, the return of the S&P 500 for the month was -12.35%. The drop hit smaller stocks even harder: The Mid-cap 400 index returned -20.25%, and the Small-cap 600 returned -22.40%. In the last six weeks of the first quarter, the market gave up nearly its entire gain since the end of 2018. [Index returns: Standard and Poors]

International stocks kept pace, in a negative way, with their US counterparts. The MSCI EAFE international equity index returned -12.49% in local currencies. Exchange rates were volatile, but overall their changes were moderate. The dollar slipped to 107.53 yen at the end of March, from 108.12 a month earlier. The dollar ended March at $1.1016 to the euro, not far from its February month-end level of $1.1001. The dollar strengthened to $1.2454 against the pound Sterling, from $1.2778 at the end of February, as the effect of the pandemic on the UK seemed surprisingly severe. The overall currency move did not have much effect on investors in overseas assets; EAFE returned -13.35% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

As often happens in sharp market downdrafts, yields on US Treasury securities fell sharply, from already-low levels. The yield on the two-year Treasury fell to 0.23% at the end of March, from 0.86% a month earlier. The ten-year yield fell to 0.70%, from 1.13%. This strength in the Treasury bond market (remember that bond prices rise as yields fall) did not, however, extend to the credit markets. Yields on corporate bonds, and especially on high-yield (junk) bonds, rose as Treasury yields fell. The overall effect was negative for the bond market, and the Bloomberg Barclays US Aggregate bond index slipped by -0.59% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

As difficult as it seems to remember back that far, the markets began February with a solid advance. After the middle of the month, however, uncertainty regarding the spread of the novel coronavirus and COVID-19, the associated respiratory ailment, took over the news and upended the markets. In the last week of the month the US stock market fell by around -12%. The White House appointed the Vice President to head a task force to respond to the outbreak and coordinate communication with the public. They also signaled their concern about the market’s response by naming Treasury Secretary Steven Mnuchin and White House economic advisor Larry Kudlow to the task force. For the S&P 500 index, the net result of the early gains and the late drop was a return of -8.23% for the full month. The losses were fairly uniform across the market, as the Mid-cap 400 index fell by -9.49%, and the Small-cap 600 index by -9.61&. [Index returns: Standard and Poors]

The coronavirus is a generalized, global peril, and global markets fell accordingly. The MSCI EAFE international equity index fell by -8.08% in local currencies for the month. The US dollar moved just a bit against other currencies during the month. It slipped to 108.12 yen at the end of the month, from 108.5 at the end of January. It strengthened a little against the euro, ending February at $1.1001 against that currency, from 1.1082 a month earlier. Weakness in the pound Sterling after the start of the UK’s exit from the European Union resulted in a month-end exchange rate of $1.2778 to the pound, from $1.3195 on January 31. With the currency movement, EAFE returned -9.09% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The public health and market uncertainty stimulated a strong flight to quality, and bonds rallied strongly. The yield on the ten-year US Treasury note ended the month at 1.13%, down sharply from its January 31 level of 1.51%. The yield on the two-year Treasury fell below 1%, to 0.86%, from 1.33% a month earlier. The bond rally gave the Bloomberg Barclays US Aggregate bond index a return of +1.80% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]

The generally upward momentum that characterized markets toward the end of 2019 continued into the beginning of 2020. Moderate economic growth, a trade truce with China, and clear expectations regarding the United Kingdom’s exit from the European Union contributed to a generally positive market tone. The market suffered a sharp reversal later in the month, however. The turn coincided with the emergence of news from China regarding an outbreak of a novel coronavirus, threatening a widespread epidemic, and most market commentators attributed the downturn to that cause. But in recent weeks the strength in the market has been unusually narrow, with a small number of large-capitalization issues advancing strongly, appearing to outweigh the much larger number of issues that incurred losses. The market averages for the month reflect this: The S&P 500 index ended the month nearly flat, with a return of -0.04%. But an equal-weighted average of the performance of the stocks in the S&P 500 gave a result of -1.82% — far different from the standard index, which gives greater weight to larger-capitalization issues. Smaller stocks’ results pointed in the same directions, as the Mid-cap 400 index fell by -2.61%, and the Small-cap 600 index by -3.97%. [Index returns: Standard and Poors]

Overseas stocks also slid, as the UK moved toward its withdrawal from the European Union, which took place at the end of the month. The MSCI EAFE international equity index returned -1.23% in local currencies. The US dollar ended the month at 108.50 yen, not much changed from its level of 108.67 on December 31. In contrast, the dollar strengthened against European currencies. It ended January at $1.1082 to the euro and $1.3195 to the pound Sterling, from levels of $1.1227 and $1.3269, respectively, a month earlier. EAFE returned -2.09% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

Interest rates fell sharply during January, despite clear signals from the Federal Open Market Committee that they consider the current stance of monetary policy to be about right. The yield on the two-year US Treasury note ended January at 1.33%, down from 1.58% at the end of December. The ten-year yield fell even more sharply, to 1.51% on January 31, compared to 1.92% a month earlier. The Bloomberg Barclays US Aggregate Bond Index returned +1.92% for the month. [Index returns: Bloomberg; bond yields: US Treasury]