March Market Madness Unprecedented

March 29, 2020

The NCAA March Madness basketball tournament may have been canceled for the first time since its inception in 1939, but another version of March Madness took its place this year.

Spurred by the worst global pandemic in more than a century, financial markets witnessed some of their largest moves since the Great Depression in March.

Nothing was immune from the madness. Stocks to bonds to currencies to commodities made moves rarely seen in history, and ETFs tracking those asset classes followed suit.

The Backdrop

Markets entered March on edge. Days before the month, on Feb. 26, the first known case of community-spread coronavirus had been reported in the United States, raising the possibility that the virus could be unleashed and undetected in the country.

Entering the month, the S&P 500 was already down 12.7% from its all-time high set on Feb. 19, and the 10-year Treasury bond yield was at an all-time low of 1.15%. Still, no one could have imagined how wild things would get from even there.

As virus cases climbed in the U.S. and overseas, cracks began forming in the economic outlook. The Fed acted swiftly, slashing rates by 75 basis points in an emergency move on March 3. That kept markets stable for about two days; then, the bottom fell out.

Bear Market Collapse

Between the start of the month and March 23, the S&P 500 lost nearly a quarter of its value. Any ETFs tracking the index—including the SPDR S&P 500 ETF Trust (SPY), the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO)—followed the market tick-for-tick lower.

Astonishingly, the U.S. stocks collapsed into bear market territory (considered more than 20% off the all-time highs) in only 16 sessions—the fastest pace in history—and then kept on falling. By the March 23 low (which is the lowest point of the sell-off as of this writing), the S&P 500 fell as much as 33.9% below its highs, the largest peak-to-trough decline since the financial crisis.

Within the precipitous March decline were some eye-popping single-session moves. Between March 9 and March 18, the U.S. stock market rose or fell by at least 4.8% in every session, a streak comparable only to periods during the Great Depression.

In those eight sessions, “Level 1” circuit breakers were triggered four times, halting market trading for 15 minutes each time.

What’s more, the S&P 500 closed lower by 7.6% or more on three occasions in that stretch, making them three of the 20 largest single-session declines for the index. That includes a massive 12% drubbing on March 16, the third-biggest drop on record—outdone only by a 12.3% plunge during the Depression and 1987’s 20.5% swoon.

The free fall on March 16 pushed the Cboe Volatility Index (VIX) to a close of 82.7, a new record for the Wall Street fear gauge.

S&P 500 In Bear Market Territory

Fixed Income Not Immune

Stocks weren’t the only asset class facing record volatility in March. Usually tame fixed income securities also swung around violently. The 10-year Treasury bond yield—arguably the most important fixed income benchmark in the world—entered March at 1.15%, already a record low.

Six sessions later, it had fallen to a once-unimaginable 0.31%. Similarly, the 30-year Treasury bond yield fell from 1.68% to as low as 0.70% in that same period, as investors dove head first into safe haven Treasuries (bond prices and yields move inversely).

ETFs that track 10- and 30-year bonds spiked dramatically. The iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) were up as much as 10.5% and 26.8%, respectively, for the year at their highs.

But just as fast as bond prices had rallied and yields had fallen, they reversed course. Only seven sessions after hitting record lows, illiquid market conditions and a dash for cash caused the 10-year yield to quadruple to 1.27%, and the 30-year yield to more than double to 1.93%.

10-Year Treasury Bond Yield

As this was happening, credit spreads began to blow out. Investors—fearful that borrowers would find it difficult to repay their debts in an environment where the whole economy was shutting down—dumped bonds across the board, including relatively safe municipal and investment-grade corporate bonds.

In a mere two weeks, the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) plunged 22% and the iShares National Muni Bond ETF (MUB) sagged 13%.

Even short maturity bond ETFs, which are expected to hardly move on a day-to-day basis, suddenly crumbled. The iShares Short Maturity Bond ETF (NEAR), which hadn’t fluctuated more than 0.25% in any session in its six-year history before March, crashed 6.2% in a single day.

Meanwhile, junk bond ETFs, which hold debt from the riskiest borrowers, fared the worst. The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) tumbled to an 11-year low.

Oil Adds Stress

The stress in credit markets stemmed from the coronavirus shutdowns that were taking place all around the world. More than half of the U.S. and a third of the global population were under some form of lockdown, grinding economies to a halt.

Those stresses were exacerbated by plummeting oil prices, which were the victim of sinking demand and surging supply. A price war between Saudi Arabia and Russia erupted mid-March, pushing oil prices to $20 for the first time since 2002, well below the cost of production in the U.S.

In turn, the United States Oil Fund LP (USO), which tracks oil futures, and the Energy Select Sector SPDR Fund (XLE), which holds energy equities, lost as much as half their value in March alone.

At the same time, with oil trading below breakeven prices, debt of overleveraged U.S. shale oil producers became toxic, setting off a cascade of selling in credit markets. HYG and LQD hold about 8% of their respective portfolios in bonds of energy companies, a sizable sum for a sector that only makes up 2.7% of the S&P 500.

Oil Prices At 2-Decade Lows

Uncertainty Reigns

The volatility in financial markets during March wasn’t a one-way street. As of this writing on March 26, the S&P 500 had rallied three-straight sessions for a gain of 17.5%—the best three-day return since 1931.

While few are ready to give the “all clear” sign, optimism has grown that the combination of unprecedented fiscal and monetary policy unleashed by governments around the world will be able to hold things up long enough for economies to reopen.

In the U.S., a $2 trillion virus aid package has been passed, while the Federal Reserve has initiated asset purchase programs with unlimited fire power, including the ability to buy corporate bond ETFs (read: Fed Says It Will Buy Corporate Bond ETFs).

That’s reduced some of the stress in credit markets, making it less likely that the economic crisis turns into a financial crisis.

No One Knows The Future

Still, the real economy is reeling. The number of Americans filing for unemployment benefits is at record levels, and the economic contraction expected in the second quarter will be worse than anything seen since the Great Depression. After that, the future becomes much hazier.

The divergence between optimistic and pessimistic views about where we go from there has seldom been greater. Anything from a V-shaped to an L-shaped recovery is possible. It could take months, or it could take years before things get back to normal.

Much hinges on what happens with the coronavirus. Whether or not the health crisis can be successfully managed will determine whether March was a painful, but short-lived episode for markets, or the start of something bigger and longer lasting.

Contact Sumit Roy at [email protected]

 

 

 

 

 

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