The equity market returns in the first quarter of 2020 were historically low. The S&P 500 was down 19.5%. There have only been 18 quarters in which the S&P 500 has declined by 15% or more. Ten of those occurrences took place between 1929-1939. During the selloff, other safe-haven assets showed their portfolio diversification benefits as long duration Treasuries were up 21% in Q1, the U.S. dollar index was up 2.5%, and gold increased by 4.5%. While Treasury bills (a proxy for cash holdings) where only up 0.28%, they outperformed the S&P 500 by 20%. That is the highest outperformance of cash verus stocks since Q4 2008.
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The positive takeaway is that the quarters following a 15% or greater decline in the S&P 500 have been very strong. The quarter immediately following a 15% or greater decline has generated a positive return 67% of the time with a median total return of 5.8%. All of the negative returns occurred in the 1930s, except for Q1 2009. The returns over the next 2-8 quarters have been positive 100% of the time post 1945 with median gains of 10.5% two quarters out, and 45% eight quarters out. This data would suggest that unless the U.S. economy is entering a multi-year depression like era, equity returns in in 2021 are likely going to be above average.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC