At Beacon, we have been saying for years that volatility is the new normal, and never has this been more true than in 2020. February and March presented both the equity and fixed income markets with absolutely unprecedented occurrences never before seen in history. As you meet with clients and prospects, here are some key talking points to keep in mind to provide perspective.
On the equity side, we had the fastest market decline in history, surpassing the sell-off heading into the tech crash, the financial crisis or even the Great Depression. From the February 19, 2020, market high, it took the S&P 500:
- Only six days to turn into the fastest market correction with a 10% drop
- Only 20 days to reach the fastest bear market in history at a 20% drop and
- Only 22 days to the fastest 30% sell-off in history
Where do we usually hide during these times of equity market crisis? Fixed income has been the answer, posting positive annual returns in every bear market in history—until 2020. All fixed-income instruments were hit with severe price dislocation due to a global liquidity crunch. Even US Treasuries—which are widely considered the most stable and liquid security in existence—saw unprecedented volatility.
- Price-to-bid spreads for US Treasuries were some of the widest and fastest ever seen:
- Ultra Long Term US Treasury Futures were down more than 7 points in just one day (March 12)—more than five times their normal averages.
- $23B iShares 20+ Year Treasury Bond fund’s price ended down 5% below the value of its assets on March 11. In its nearly 18 year history, the average difference between its price and the value of its assets has been .03%. That is 166 times its average dislocation!
- The bid-to-ask for 10-Year Treasuries widened to 30-40bps in March, versus its normal range of 1-3 basis points.
- Corporate bond spreads widened quicker than ever with 1- to 3-year bonds reaching 330bps.
- These historical events were met with unprecedented moves by the Federal Reserve.
- The target rate was cut basically to zero.
- Quantitative easing was initially announced at $500B before becoming uncapped.
- Liquidity facilities and repo action were at half a trillion dollars, twice the daily record set during the financial crisis.
- And for the first time ever, the Fed can now buy corporate bonds and corporate ETFs!
What happened in the fixed income market in March was truly off-the-charts rare, a 10 to 11 standard deviation event, according to Vanguard’s Global Head of Credit Fixed Income. Statistically, a 10 standard deviation occurrence should occur twice every 1,000 years, and an 11 standard deviation event should occur five times every 10,000 years.
For all this historical data and more, watch a 7-minute video from Beacon Managing Director Dan Baccarini, or download the presentation for more key statistics and sources.
Where do we go from here?
Emotional-decision making is a critical danger to all investors, but now even more so than ever in these unprecedented times. The need for a consistent, mechanical approach to minimize losses before they become catastrophic as well as a consultative, educational approach for proactive communication with clients has never been more essential. Reach out to your Beacon Representative to discuss how they can help support your business.