High Level Commentary

MARKET PERFORMANCE-As Of Friday, May 22, 2020

Last 3+ Last 12+
Major Benchmark Performance:  Months YTD Months
Since: 4/30/12 12/31/19 12/31/19 3/31/19
As Of: 5/22/20 5/22/20 5/22/20 5/22/20
US Large Cap-S&P 500 1.48% -7.91% -7.95% 2.38%
US Small Cap-Russell 2000 3.42% -15.68% -18.39% -13.54%
Foreign Developed-MSCI EAFE 0.67% -15.53% -17.29% -10.76%
Foreign Emerging Mkts-MSCI EEM -0.57% -13.02% -17.07% -12.50%
US Bonds-Barclays Aggregate 0.29% 3.30% 5.28% 11.17%
Long Treasury-20 Yr+ US Treasury Bonds -0.71% 15.01% 23.04% 37.87%
High Yield-Bloomberg 0.99% -7.87% -7.84% -3.15%
Performance includes Total Return for January through April and preliminary price
performance for May.

The Bear Market struck with a vengeance in March after a record long 11-year bull market and a record long 10 ½ year economic expansion. In addition, the drop was accompanied by record-high volatility. The S&P 500 fell from an all-time high to a bear market decline of over -20% in only 22 trading days, the quickest decline in history, even faster than during the Great Depression. Moreover, the S&P 500 set a record of eight consecutive days in which the index moved up or down by at least 4%. Then, the S&P 500 made the quickest recovery in history from a Bear Market to a technical Bull Market (up 20% from a recent low). With the price volatility at record levels in both directions, the overall investment performance has improved significantly since the March 23 lows.

Performance has rebounded since the March lows. Although the S&P 500 fell -33.9% by March 23 from the all-time high, it is now down only -7.95% YTD as of May 22.  U.S. small caps, foreign developed equity and emerging markets continue to lag behind the perceived relative safety of larger U.S. companies and are down roughly -17% to -18% so far in 2020.   Longer maturity U.S. Treasurys benefitted from declining interest rates and from investors seeking a safe haven, and are up 23% so far this year. Corporate bonds and especially high yield declined sharply in March due to increasing recessionary fears, but have since recovered somewhat in April and May largely due to the Federal Reserve’s corporate credit support.

Economic Statistics are coming in worse than expected.  Unemployment has jumped to 14.7% in April from only 3.5% February.  The University of Michigan Preliminary Consumer Sentiment Index plunged from 89.1 in March to 71.0, the largest decline on record. Retail sales declined 8.7%, the largest decline since 1992 when this data series was initiated. The Leading Economic Indicators came in at -4.4% for April after falling -7.4% in March. These statistics point to the sudden, large shutdown of the U.S. economy. Although these statistics show dramatic declines, it needs to be remembered that this has been caused by the unprecedented coronavirus pandemic. As this pandemic subsides, the economic statistics should show significant improvement. New York and other hotspots have seen a flattening and decline of new cases and hospitalizations. As the actual numbers decline, there will be a gradual re-start of the economy. This re-start may phase in with different industries and different regions. At this time, it is difficult to know how quickly the economy will recover.

Stock Market and Economic Disconnect: The markets have been buoyed in recent weeks by indications of “a flattening of the curve”, and by the prospect of re-opening the economy. There is also preliminary evidence supporting Gilead Science’s Remdesivir, an anti-viral treatment, and by vaccines from Moderna, Pfizer and others.  Moderna was said to “show promise” in phase-one trials and is progressing to phase-two trials.  Dr. Faucci also expressed optimism regarding a relatively quick approval, however a 12-18 month timeline still looks most likely.  Any Covid-19 vaccine would likely be first used to protect front-line health care workers and elderly who are at most risk to the virus.  Over time, a vaccine would achieve “herd immunity”, whereby the antibodies of the majority of individuals built up, either via exposure or vaccination, are sufficient to protect the remaining vulnerable people.

The economy still looks like a U-shaped recovery, not V-shaped, and it looks like there is a disconnect between the recent market rebound and the economic landscape. Although the market was up in April, it still looks vulnerable to additional sell-offs. The current situation seems to be the opposite of what happened in December 2018. At that time, the market sold off hard based on fears of a global economic recession, even though the economic data did not show an imminent recession. On January, 2019, Cornerstone described a Market/Economic Disconnect where economic fundamentals in late 2018 were much stronger than indicated by the sharp market decline. This time, however, the economic fundamentals are very weak, but the market has been ignoring these weak fundamentals as it rebounded significantly in April and May.  Only time will tell how the coronavirus recession plays out, but it is helpful to stay grounded in longer-term economic and market fundamentals.

It is helpful to remember that Bear Markets since 1950:

-the average bear market declined -35% and lasted an average of 14 months.

-the average bull market gained 199% and lasted an average of nearly 6 years.

Bear markets are typically much shorter than bull markets, they go down less, and they have always given way to another bull market.

The Federal Reserve has been very proactive ensuring funding for banks and companies. The Fed re-established many of the initiatives from the 2008 Great Financial Crisis to deal that have proven positive in the past. A major difference is that the Fed established these support programs so quickly.

-Cut the Fed Funds rate to near zero in an emergency meeting.

-Committed to buying $700B US Treasury and mortgage bonds to provide liquidity.

-Provided backstops for retail and institutional money market funds.

-Provided support for short-term commercial paper.

-Coordinated with global central banks to provide dollars as wary foreign investors sought the safety of the U.S. dollar.

U.S. Legislation: Congress passed a $2.2 Trillion coronavirus aid package to help stabilize the U.S. economy. Key provisions include:
-$560 B for individuals.

-$153.5 B for public health.

-$340B for state and local governments.

-$377B for small businesses. Many of these loans are forgivable if these companies retain their employees.

$500B for large corporations. Some of the support will go to the airline and energy industries.

This package is being called a rescue plan, and many politicians say there will need to be another round to provide stimulus. As with the Federal Reserve’s timely actions, the legislation will be implemented far faster than was the case in the 2008/2009 Great Recession.

President Trump announced a $2 Trillion infrastructure bill on March 31. Infrastructure bills have been debated in the past, but lacked support due to a lack agreement on funding sources. This time there may be greater support.

There is additional fiscal support being considered by the Democratically-controlled House, but Senate Republicans are taking more of a wait-and-see stance.

Morgan Stanley released an estimate of the U.S. budget deficit of $3.7 Trillion for calendar year 2020, and they see an additional $3T in 2021. This would make the deficit approximately 15-20% of the U.S. GDP. This is larger than the 2008/2009 Great Recession level. This analysis does not incorporate the proposed $2T infrastructure bill. Although there is a clear need for monetary and fiscal spending during this downturn, there is also a looming longer-term issue related to U.S. budget deficits.


International Actions: International support has also been swift and significant. The European Central Bank committed to buying Euro 750 billion of public and private debt in a move viewed very positively by the market. In addition, Germany announced a $160 billion program to fund social benefits and direct aid to virus hit companies. England, France, Italy, Spain, India, Japan and other countries are providing several hundred billion dollars of support as well. All told, there is a very significant and timely international response to deal with the COVID-19 outbreak.

Economic Forecasts-V-Shaped or U-Shaped-Economic forecasts continue to be revised down. The speed and suddenness of the global shutdown is unprecedented and economists and others are only gradually beginning to understand the magnitude of this change, and then to incorporate this into their models. For example, Goldman Sach’s initial analysis of COVID-19 impact foresaw minimal impact to the U.S. and they saw 1.2% US GDP growth for 2020. As of March 21, Goldman has significantly revised their 2020 GDP growth rate down to -3.8%. This forecast includes a -24% annualized growth rate for Q2 and then a sharp Q3 recovery of 12% annualized and Q4 gain of 10%. This analysis sees a V-shaped recovery.   The point is not to throw rocks at Goldman Sachs, because they are smart, savvy investors. The point is that analysts are increasingly negative about near-term prospects.   Further, it warrants caution regarding how much we really comprehend about the coronavirus impacts.

Given the unprecedented nature of the shutdown, it seems that there may be more caution by both consumers and companies as we emerge on the other side and a U-shaped recovery is more likely. Finally, the coronavirus outbreak may prove to be worse than the 9/11 terrorist attacks, but it doesn’t look as severe as the full-blown 2008/2009 Great Financial Crisis.

News from China indicates that there are no new local cases of the coronavirus although there are still cases being reported from people who have traveled internationally. Apple and Starbucks also report that they have reopened their stores in China. In addition, the CEO of Qualcomm (the leading developer of smart phone chips) stated that demand from China has returned to normal. These reports do not indicate an imminent global turnaround, but they do represent a measure of improvement in China.

What’s Next? There is no good historic precedent for the coronavirus given that globalization has allowed pandemics to spread much more quickly than in the past. As a result, a recession, both globally and in the U.S., is almost certain.

Although a recession looks likely, the current market downdraft means a lot of economic weakness is already priced in. Nevertheless, the depth and duration of the coronavirus remain unknown and continued volatile market downdrafts can be expected.

There is an open question about whether these initiatives will be sufficient, or whether they are already too far behind the curve. Given the unprecedented nature of this pandemic, it seems prudent for our government and our health care providers to respond as aggressively as possible.


Portfolio actions that you take (or don’t take) at this point can feel highly uncomfortable but the decisions are not rocket science. Investors have been bailing on investment holdings at a near-record pace and this is no time to be part of the herd’s stampede. Although there is much we don’t know about the ultimate coronavirus impact, there is also much we do know. There is nothing unique about the list below, but it is supported by ample historical evidence.

-Stay the course. Fear is really the biggest risk.

-Don’t sell unless you have a dire need for cash.

-Rebalance the portfolio to restore beaten-down equity holdings to a weight consistent with your long-term investment objectives.

-If you have cash, then add to equity holdings. This isn’t easy, but a good strategy is to make several smaller investments over time rather than one larger trade. No plan is fail-safe, but this strategy is a way to get into the market without making one big move.

– At this stage in the bear, there is likely to be far more upside than downside. Remember that investment performance is improved by buying in bear markets, not selling.

Although the coronavirus has dominated recent headlines, there are other factors that still impact markets:

The Chinese trade deal. After nearly two years of negotiations, the trade agreement was signed on January 15. The deal called for China to increase U.S. purchases by $200 billion over the course of 2020 and 2021. The deal requires China to open their markets to financial services companies and it provides new protections for trade secrets and intellectual property. The deal surprised some observers because it left in place tariffs on $370 billion of Chinese imports to the U.S. Since these tariffs remain in place, it is seen by some as reducing the prospects for growth in business investment.

This “phase one” deal is seen as a good start, and it sets the stage for further negotiations for a phase two deal. A phase two deal will deal with more difficult issues including forced technology transfer, theft of intellectual property and Chinese government support of their state-owned enterprises. President Trump said remaining tariffs “will come off” if they are able to negotiate a phase two deal. Critics of the deal are skeptical that China will actually increase imports of U.S. goods and services by $200 billion, and they are pessimistic about achieving a meaningful phase two deal. President Trump is clearly using tariffs in the short-term to secure hoped-for greater tariff reductions in the long-term. The trade dispute has already hurt manufacturing and business investment, and estimates of a negative impact on U.S. GDP range to as much as -1%. From a broader perspective, this deal clearly reduces the escalation of the trade war, and it should provide a boost to U.S. GDP.  Unfortunately, the coronavirus pandemic reduces China’s potential to meet the trade targets and contentious trade rhetoric is coming from both sides.

Markets were strong over the course of last year. Despite a rocky start to 2020, 2019 was a very good year. The S&P 500 large cap index was up a solid 31.5%, and the Russell 2000 small cap index was up 25.5%. Foreign market performance for the year was positive but trailed the U.S largely due to stronger economic growth in the U.S. The MSCI-EAFE developed market index was up 22.0% and the MSCI Emerging Markets Index was up 18.4%. Corporate earnings provided support for the market. Although third quarter earnings were down on a year-over-year basis, they were not down nearly as much as many market participants had feared. In addition, 2020 corporate earnings are expected to increase 9.6% according to FactSet. U.S. stocks were also supported by continuing corporate stock repurchases and significant foreign demand.

U.S. Treasuries: Interest rates were relatively weak in 2019. The 10-year U.S. Treasury bond started the year at a yield of 2.66%, but it dropped to 1.46% on September 4th. In addition, the 30-year US Treasury fell to an all-time low of 1.94% on August 28th. (A new low of 0.99% was established on March 9, 2020 based on fears of the coronavirus.)  Since September 2019, interest rates recovered somewhat, and the 10-year bond finished the year at 1.92%. Based on these interest rate declines since the beginning of 2019, long treasury bonds total return performance was up a hefty 15.2% for the year as bond prices moved up with the decline in interest rates. High Yield Bonds were up 14.3% for 2019 based on reduced fears of an imminent recession. Interest rates have trended down so far in 2020. Long treasuries have been impacted by the fears of the coronavirus causing weaker global economic growth and by a flight to quality. High yield bonds have been very weak so far in 2020 based on a global economic recession.

Inverted Yield Curve: Last summer market pundits and the financial press loudly touted the risk from an inverted yield curve-the abnormal situation where interest rates on longer-maturity 10-year US Treasuries are lower than interest rates on shorter maturities like the 2-year US Treasury note and the 90-day Treasury bill. Historically, an inverted yield precedes most U.S. recessions. Since last summer, short rates have moved down below the U.S. 10-year U.S. Treasury interest rate, so that the yield curve was no longer inverted. By January and February of 2020, however, the yield curve inverted again as longer-term interest rates dropped sharply. Although an inverted yield curve may once again be a precursor to a recession, it is important to note that the timing is hard to predict. Analysis from Credit Suisse shows that a recession occurs on average 22 months after the inversion. Moreover, stocks often to do well after an inversion with an average gain of more than 15% in the 18 months following the inversion. This means that an inverted yield curve is not a time to make rash short-term portfolio changes. Instead, it is more prudent to maintain a disciplined long-term perspective that maintains proper asset allocation, diversification and portfolio rebalancing.

Big Picture:

-The U.S. economy gained strength during 2019, with a particularly strong employment situation. The payroll report released on March 6th showed continuing job growth of 273,000. The unemployment rate is now at a 50-year low level of 3.5%. This will change drastically, but job growth was strong heading into the coronavirus outbreak.

-U.S. economic data for consumer spending and housing were also strong heading into the coronavirus outbreak.

-Manufacturing and capital spending in the U.S. have been anemic, largely due to uncertainty related to trade policy and tariffs. As with other economic statistics, CAPEX will decline.

-Corporate earnings for 2019 were up 0.2% according to FactSet. Consensus earnings forecasts for 2020 are still being revised lower, and they will be down significantly for 2020. The 2020 sell-off has obviously made stocks cheaper, but the market will be focused on the timing of the ultimate recovery.

– Eurozone 2019 GDP growth was recently reported at 1.2%, down from 1.9% in 2018 and 2.5% in 2017. Although the Eurozone economy has been weaker than the U.S., they were able to avoid a recession. Given the shutdown, especially in Italy, Europe is likely already in a recession.

Risk Factors:

-The spread of the coronavirus is proving much more troublesome compared to previous global pandemics.  At this time there is no good historical precedent, and It is difficult to determine the depth and duration of the global recession.

-The killing of Qassem Soleimani and Abu Mahdi al-Mohandes on January 2 caused a market downdraft and a spike in oil prices, but tensions have moderated since then. Only time will tell if there is additional retaliation and what will be the longer-term ramifications. This event follows the September 14th, 2019 attack on Saudi Arabia’s Abqaiq plant caused an oil price spike but oil supplies remain sufficient to meet worldwide demand. These two events are examples of geopolitical risk where the current level of complacency may give way to significant downside. It is ironic that crude oil has recently plunged to $20/barrel as Saudi Arabia and Russia are engaged in an oil price war and as demand has plummeted due to the global economic shutdown. It is clear that oil remains a volatile commodity.

-The impeachment of President Trump did not impact the markets because the Republican-controlled Senate did not convict the President. For historical perspective, stocks gained 28% in the year after impeachment efforts were initiated against President Clinton but they dropped 39% in the year after impeachment efforts were initiated against President Nixon. For President Trump, the impeachment does not appear to be having any impact.

-The 2019 federal government fiscal year budget deficit ballooned to $984 billion up 26.4% and up $205 billion from fiscal 2018. Although total receipts were up 4.0%, outlays were up 8.2%. Individual income tax receipts were up 2.0% and corporate tax receipts were up 12.3%. The budget deficit is the result of large government spending increases and the 2017 tax cut law. One particularly troubling aspect of the budget deficit is the rapidly increasing interest payments on the accumulated government debt. The federal government spent $380 billion on interest payments on the debt and this will continue to grow rapidly as ongoing budget deficits add to the government debt level. Moreover, interest rates are low but may well move up in the future, and this will make the interest payments even larger. It was unprecedented for the government to run such a large deficit during a period of economic growth because spending on unemployment and other safety-net programs are lower and tax revenues are higher. Now that Congress has passed a $2 Trillion rescue package, deficits will be even larger. If there was ever a time for deficit spending, now is the time.

– Despite the political rancor the U.S.-Mexico-Canada trade pact was been approved by both the House and the Senate and signed by President Trump. In addition, the $1.4 Trillion appropriations bill was passed. This bill provides funding for domestic and defense spending through September 30, 2020 and avoided another government shutdown.

-The Wall Street Journal lists the risk of recession within a year at nearly 100%. In a sign of how quickly things can change, the risk of recession was seen at 18%.

-Global economic growth weakened in 2019, particularly in China and Germany. Only time will tell regarding 2020 global growth.

-China’s first quarter GDP was reported at -6.8%, the lowest level in nearly three decades.  Japan was down -3.4% on an annualized basis and the UK was down -7.75%.

– The International Monetary Fund released their April 2020 World Economic Outlook and it showed a global GDP decline of -3.0% for 2020 and a 5.8% recovery in 2021.  For perspective, global growth was 2.9% in 2019, 3.6% in 2018 and 3.8% in 2017. The coronavirus outbreak is likely to cause additional downward revisions to the global growth rate.

-The UK Brexit separation was completed on January 31 after Boris Johnson achieved a large Conservative Party election majority. The Brexit withdrawal process began in June 2016, and trade negotiations with the European Union will be the next big issue. Trade terms will need to be negotiated by year-end 2020, so Brexit will continue to be an ongoing issue. Nevertheless, a so-called hard Brexit has been avoided.

For more detail see:

Markets & Economics

Market Performance


Cornerstone maintains significantly more data and graphs than what is presented in this website.  Contact Jeff Johnson regarding specific data questions and comments.

Yahoo Finance link is helpful for daily market activity:  http://finance.yahoo.com/