Investment Review and Outlook – April 2020
Things that Matter
The COVID-19 pandemic has upended life on an unprecedented global scale. As you read this note, most of us are indefinitely sheltering-in-place, worrying about our loved ones’ health, and navigating the new rhythms of our restricted daily lives. Personally, I am working from home (as are all Daintree employees), sharing the house with my wife, our two adult sons, and our dog. I am thankful to still have work, newfound family time, long walks, and no commute. These are unforeseen blessings.
I expect that we will adapt and learn many things during this event, from healthcare to investment management. As we have communicated with many of you over the past few weeks, we have been struck by the common theme of caring for those around us. First with our families and increasingly with our communities, however we define them. Many of us are undertaking acts of kindness for neighbors, delivery persons, clerks, healthcare workers, and others we encounter, to promote our collective well-being. Stories of compassion and thoughtfulness have become a meaningful part of how we are dealing with this, along with an amazement for our healthcare workers. Our hope is to learn new ways to consider others and especially those in need – the things that matter most. I am encouraged to see more of these types of actions lately and hope that you are seeing them as well.
Markets and Economy
At this time, the duration of the COVID-19 pandemic and the resulting economic shut down remain largely unknown. As such, predictions about economic outcomes and lasting effects vary widely. What we can say with confidence is that the previous few weeks’ economic developments were unprecedented in modern history and that the roadmap for navigating this crisis is being drafted in real-time. So far, markets have discounted a great deal of the decline to U.S., European, and Asian GDPs, while also factoring in the various financial relief packages and global central bank intervention.
The most recent U.S. figures show that economic output is 25% lower on average in the past few weeks, so GDP could be down that much (or more) in the second quarter. The timing of a recovery is also unpredictable, as there are no historical analogues. The outcome seems largely dependent on how quickly we can control the current COVID-19 outbreak and implement policies to protect against its resurgence. Visibility into public health news will be at the forefront of any turnaround, but markets will also likely be a leading indicator of a recovery before it occurs, as markets are traditionally a discounting mechanism.
The following charts show the dramatic speed and volatility of markets as this COVID-19 pandemic unfolded in late February and early March. The novel nature of this event makes any duration predication almost impossible at this stage.
While this event is historically unprecedented, we do think this economic downturn is more similar to the post 9/11 period in 2001 than the Global Financial Crisis (GFC) of 2007 to 2009. The difference between 9/11 and the GFC is that the GFC was driven by a systemic shock to the system with resulting dislocation across financial markets, while 9/11 and this pandemic were caused by external shocks in otherwise healthy economies. So far, thankfully, market dislocations have been limited and avoided in this crisis. Clearly the U.S. Treasury is trying to stay ahead of the pandemonium and using all of its available monetary “tools.”
To recap, in the first quarter of 2020:
• Global stocks (as measured by the MSCI All Country World Index) decreased by 21%; while
• Bonds (as measured by the Bloomberg Barclays U.S. Aggregate Intermediate Index) increased by 2.5% as 10-Year U.S. Treasury yields decreased from 1.9% to 0.6%; while
• Diversifying Strategies (as measured by the Morningstar Multialternative Index) were down 10%; and
• Real Assets (as measured by the blended commodity/property index) were down 25%.