June 8, 2020

Climbing Out of the Q1 Corona Chasm

by Robert Jenkins.

Going into 2020, investors were somewhat jubilant off the back of strong market performances across asset classes in 2019 and a healthy recovery from the sharp selloff in the final quarter of 2018.

Pundits largely overlooked clues that markets might be overvalued, focusing instead on asset prices buoyed by obliging central banks around the world and the apparent continuing upward trajectory of economies’ decade-long recovery from the 2008 financial crisis. Returns across asset classes were mostly in the double digits, with global fixed income ranging from 4 to 10 percent and global equities from 20 to 30 percent across major market regions. Then, early in the new year, a news story emerged from China about a virus that seemed a world away from most developed markets… until it wasn’t.

Global average returns – full year 2019

After many major indices peaked in the third week of February this year, markets began a staggered but precipitous fall over the month that followed, shedding more than 30 percent of their value in many regions as the world reacted to the pandemic. In the past, market downdrafts have been characterized by investors running for the hills and shedding risk assets, which typically meant selling off their stocks and buying safer bond funds. This classically reflexive behavior has frustrated investors through many a market downdraft, since it locks in their losses and forces them into a “game” of timing the markets, trying to get back in. It is a game few ever win, and as a result many investors never fully realize the benefits that investing in the stock market could have for their long-term wealth goals. On this occasion, however, that did not happen. Despite secular trends across developed markets of reduced flows into equity funds, equity fund flows largely held their own in Q1, with most subsectors of equity products remaining on the flow trends they had followed for several previous quarters.

Global average returns – first quarter 2020

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