March was an exceptional month. The US stock market suffered its fastest bear market in history, while the stock market in the UK witnessed its biggest one-day fall since 1987. But there was upward volatility too. Near the end of the month, many developed stock markets rebounded. Clearly, Covid-19 has had profound effects on the global economy and to everyday life, including for Nutmeg staff. In line with the UK government’s guidance on social distancing, our teams are working remotely, and we filmed this month’s update over the web.
The past month has been one of the most eventful periods in the markets since Nutmeg was founded back in 2012. Can you tell us what’s happened?
That’s right, March has been a historic month for financial markets, for the global economy and for society as a whole. In fact, so much has changed in such a short period that it’s sometimes difficult to remember that this has been going on for only four weeks or so, rather than months.
From a financial markets’ perspective, the month started on a weak footing. In February, markets were caught off guard by the more prevalent spread of Covid-19 outside of China, where it had seemingly been controlled. The advance of the disease into Europe and the US in early March drove a rapid adoption of containment measures that financial markets simply weren’t adopting as their base case – that is, the disease moved quicker and actions to halt its advance were largely more restrictive to activity than anyone initially imagined.
The velocity of the news flow was also matched by the velocity of market moves, and we saw market volatility accelerate past even the peak seen in the 2008 financial crisis, as investors tried to rapidly understand and digest what the changes meant to businesses’ operating environment. The fast-paced nature of that news flow made this especially challenging and that’s why we witnessed one of the most volatile months for many years.
Market volatility is something that we, in the industry or as investors, talk about a lot. How extraordinary or not has the volatility we’ve seen in March been?
Well, the answer is it’s been pretty extraordinary. Some of the moves we have seen in financial markets over the previous four to six weeks have been historic and maybe I can give you a feel for the magnitude of some of these events with a few records from this period.
- In the US stock market, we have witnessed the fastest bear market in history. That means a 20% fall from the peak. It happened in just 16 days. It took over eight months to reach the same 20% fall in 2007/2008.
- We’ve witnessed the third and sixth biggest daily losses in history, and had the first three-day period since 1933 with more than a 9% loss or gain each day. But we’ve also seen the biggest three-day gain since 1933, and two of top 15 biggest one-day gains in history.
- We’ve seen the global oil price fall to levels last seen in 2003, volatility reach an all-time high and US government bond yields reach an all-time low.
- Closer to home in the UK stock market, we’ve seen the worst one-day loss since 1987, but also the best three-day gain since 1979.
So, we’ve seen relatively unprecedented moves in markets over the past month, at least in modern times, in the face of an unprecedented disruption to the global economy. But we’ve also seen an unprecedented reaction, in terms of three types of policy response: medical, fiscal and monetary.
I’ve already touched on the medical policy response, but this continues to advance, and we expect to see some improvement in the medical data as lockdowns and social distancing have an effect.
We have seen a significant and far reaching monetary policy response. This is the response from central banks to lower interest rates, free up liquidity in the system and promote orderly financial markets. We’ve seen interest rates slashed globally alongside other initiatives such as the Federal Reserve announcing its commitment to unlimited quantitative easing, which is the purchasing of securities, to seek to support financial markets. But we knew going into this crisis that central banks had less room to cut interest rates than in previous economic cycles, given their relatively low starting point. And so, governments have needed to take up more of the burden.
Therefore, we have seen meaningful fiscal policy implementation too. These are the policies that we need from governments to support the businesses and workers in their economies. These are the policies that can have a quicker economic impact, securing jobs, supporting businesses and stopping this temporary shock to activity becoming a much deeper prolonged recession. In the UK, that package has exceeded what was delivered in the 2008 financial crisis and we’ve also seen meaningful packages approved in Germany and the US that represent around 10% of GDP in both of those countries.
Given the volatility we’ve seen, where did major financial markets finish the month?
Global equity markets had a positive final week of performance in the month, but it is still the worst month for global equity performance since the financial crisis, and the fourth worst since 1969.
Global equities finished the month down 13.7%. In the US, we saw losses of around 14% for the S&P 500; in Europe, losses of around 17%; Japan, losses of around 7%; and in the UK, larger companies delivered losses of just over 13% while smaller companies delivered losses close to 22%.
In the corporate bond market we witnessed losses of close to 7% in sterling corporate bonds, while US high yield bonds lost just under 12%. The global oil price meanwhile fell a staggering 55% while gold gained less than 1%.
The stand-out performers were in the government bond market as investors sought safe havens. US government bonds delivered returns of around 3.6% and UK government bonds 1.4% for the month of March.
After those big falls in stock markets, lots of people are hoping there will be a rebound. What’s your view – have we reached the bottom?
Well we have in fact seen a small rebound off the extremes of market moves and as we’ve observed before, when markets are volatile this can mean both sharp down movements but also up movements.
Bottoms in markets are notoriously hard to spot, as in fact are the peaks; however, it would appear that we are through the worst of the market volatility in terms of investor panic. We know more today about the impacts than we did a week or so ago, but there is still a lot we don’t know – how long the lockdowns continue for, how quickly stimulus is having an impact and how bad the damage is at a corporate level. Those are things we will learn more about in the coming weeks. We’ll be looking at the high frequency data such as the US weekly jobless claims to try gauge the extent of economic turmoil thus far.
But we remain at a critical stage. Markets want to see that containment measures work. They want to see patterns in containment that are successful – a path out of the crisis, so to speak. There are still risks to the downside, most notably that the US is yet to face the same degrees of shutdowns as some European countries and is still seeing a rise in infection rates. Life is slowly returning to normal in Hubei province in China, but the risk here would be if we saw any further contagion once normalisation was underway – a so-called second wave of infections that results in a further restriction on activity.
If we begin to see successful containments and paths to normalisation in countries such as China and South Korea, then that builds confidence that there is a solution to the problem and that it can be just a temporary shock. In the meantime, we need stimulus to help businesses survive, to keep people employed and to limit the secondary effects of the activity shock on the global economy.
Obviously, the news headlines are dominated by the coronavirus at the moment, but is there any other economic or financial news we should know about?
The other major story that took markets by surprise in March was a significant move in the global oil price early in the month. Oil prices had been under pressure from reduced activity in Asia due to the initial outbreak of Covid-19. However, the failure of Opec nations led by Saudi Arabia and Russia to agree a collective strategy on managing the supply of crude oil, and therefore manage the price, led to a collapse in oil prices as Saudi Arabia walked away from talks and subsequently increased production. Oil fell from around $52 a barrel at the beginning of March to about $35 a barrel.
That increased production also came at a time of increasingly aggressive containment measures across the world, and that has materially shifted the short-term demand dynamics for oil, in turn driving prices even lower. We are now back to levels last seen 2003, around $22 a barrel.
That’s bad news for many producers of oil, companies and governments who rely on oil revenues because demand has materially fallen at the same time that production has increased. In fact, it may make the production of certain types of oil such as shale oil economically unviable in many instances. But it’s also good news: for consumers, where a lower oil price acts as a tax cut; for businesses, which are large consumers; and countries that are large importers of oil – a key input commodity to their economies just became significantly cheaper.
Given everything that’s happened, what changes have you made to the Nutmeg portfolios?
We always seek to position our portfolios appropriately for the balance of medium-term risk and return. We were cautiously positioned going into March, with less holdings in risky assets such as equities than we would expect to hold over the long term. We did reduce this risk further early in March and added to government bond positions in order to add greater protection to portfolios.
During the month we also reduced our holdings of high yield bonds in the US. These are bonds issued by companies with lower credit ratings. That was on the basis that an activity shock materially changes the affordability of the debt for many companies in the energy sector, which is the largest high yield bond sector, as well as in smaller sectors such as travel, leisure and hospitality.
In addition, we have decreased our holdings of smaller companies in Europe and the US, which typically do not fare well in recessionary environments, and increased our exposure to large cap technology companies that have strong balance sheets with large cash positions, and have business models with higher recurring revenues.
While our customers are investing for the long term, it is still interesting to know how the Nutmeg fully managed portfolios performed this month. Can you tell us?
Unsurprisingly, given what we’ve seen in global financial markets, it’s been a volatile month for investment performance in Nutmeg portfolios.
For the month of March, fully managed portfolio returns range from -2.8% in low risk portfolios to -11.5% in the highest risk portfolios.
In our socially responsible portfolios, returns range from around -1.7% at the lower end of risk through to around -9.2% in the higher risk portfolios.
So, some significant losses in the higher risk portfolios that contain greater equity assets, while those portfolios with significant allocations to government bonds have weathered the storm to a greater degree.
This month’s customer question came to us during one of your recent webcasts but there wasn’t time to answer it. The questioner, who chose to remain anonymous, asked: “How many years will it take to recover to level performance looking at 2008 historical data?”
That’s a good question. The answer, for one of our medium risk portfolios – for example a risk level 7 portfolio, is that the total time from peak (the first losses) to recovery of all losses would have been around three years in 2008.
However, it’s worth considering couple of things here. The total drawdown – the total negative peak-to-trough performance move in 2008 – was more severe than what we have just witnessed in the past month. In 2008, the move was around a fifth bigger for a portfolio of this risk level, at around -25% versus the -20% after the recent market peak in a risk level 7 portfolio.
It would also have taken significantly longer for this drawdown to occur in the first place. We’ve just witnessed, as I mentioned earlier, the fastest bear market on record. Now, whether we will test those lows again remains to be seen, but we have reached a lower point earlier in the journey this time around. And that leads to another important point – it’s worth remembering that not all recessions are as long as 2008/2009. The drivers of recession tend to be different on each occasion but the most painful have been those where there have been large economic excesses that need unwinding, for example in the global financial crisis.
This is not about the build-up on excesses in a system, this is a supply and demand shock. And it’s the sudden nature of the shock to activity that helps explain why we’ve witnessed such sharp moves in markets. If the virus can be contained effectively, and stimulus can support the economy through this shock, then there’s reason to believe a recovery should be able to begin sooner.
About this update: This update was filmed on 1 April 2020 and covers figures for the full month of March 2020 unless otherwise stated.
Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.