Spring Quarterly Commentary

“Let me not pray to be sheltered from dangers, but to be fearless in facing them. Let me not beg for the stilling of my pain, but for the heart to conquer it.”
- Rabindranath Tagore, 1861-1941 Polymath, poet, musician, artist

This letter is one of the more difficult ones to write because things are changing so rapidly. We caution readers that we are not epidemiologists, but it is our job to try, to the best of our ability, to figure out what is going on, and that’s what we attempt to do with this letter. Such is the nature of predictions, that much of what we say may ultimately prove wrong, and some thoughts will be out of date even by the time you read this. This letter is also longer than usual as there is more to talk about.

No one needs to read this letter to learn that the novel coronavirus has vastly altered the financial landscape and the way we live. The impact on financial markets has not only been profoundly deep, but also incredibly sudden. When the Tech Bubble “burst” in the year 2000, it took 18 months for the S&P 500 Index to decline 32% from its peak. In the current crisis, it took only 16 days. Even more incredibly, by some people’s definitions (not ours), the bear market was not only the fastest ever, but also the shortest ever, with stocks already having rallied more than 20% off their bottom1. The chart atop the following page is over a week old but does a good job of showing the abruptness of the current bear market (red line on the chart) versus other historic recessionary declines in the S&P 500 Index.

As always, major indices such as the Dow or S&P 500 “hide” much of the damage. For example, small cap stocks logged their worst quarter ever, with the Russell 2000 down almost 31%.

By many measures, we also just experienced the most volatile stock market of all time. While normally a 1% move would grab one’s attention, 3%+ moves have recently become the daily norm.

Market chaos was not just restricted to stocks. The extra yield required by investors in even the safest, most highly rated municipal bonds rocketed past the levels seen in the 2008 financial crisis. More broadly, mutual fund investors headed for the exits, as markets exuded once-in-a-century extremes... for the second time in twelve years.

These examples serve as but a small sample of this quarter’s tumbling, soaring, and wilding gyrating financial markets. No matter where you look, from currencies to spreads to CMOs to swaps, things have been really, really, crazy.

Before we start analyzing the circumstances of this specific bear market, it is worth setting a baseline by looking at some statistics on bear markets in general. The average bear market (defined as a 20% drop from its peak) since the 1800s: declined 38%, required 28 months to hit bottom, and took 60 months (yes, 5 years) to fully recover. In comparison, assuming the March 23rd low of 2,192 in the S&P 500 Index was “the” low, the 2020 bear market dropped 35% and lasted a mere month. We now sit about 17% below the mid-January high. Here is the full history of past bear markets for comparison: