By now you have probably heard that the first quarter of 2020 was the worst quarter for the Dow Jones Industrial Average since 1987. For the S&P 500, it was the worst quarter since 2008.
While those stats are startling, they could have been much worst had the quarter not started so well. In reality, the first quarter saw the market go through two very distinct phases. From January 1 through February 19, the market was continuing the bullish phase that you could argue goes all the way back to 2009. From February 19 through March 31, the market went through one of the sharpest drops since the 1929 market crash.
Looking at the S&P and comparing it to other major world indices we see that it was in the middle in terms of performance. The index lost 19.77% during the first quarter and that was similar to the 20.04% loss in the Japanese Nikkei.
I found it somewhat ironic that the top index of the five I looked at was the Shanghai Composite. The Chinese index only lost 9.53%. The Chinese economy and stock market were dealing with the COVID-19 virus long before the rest of the world and it came through the quarter less phased than the others. As for the two worst performers of the five, the French CAC40 fell 26.51% and the German DAX fell 24.96%.
Looking at the 10 main sectors and their corresponding Select Sector SPDR ETFs, we see that the energy sector got crushed in the first quarter as global demand for oil dropped dramatically. Oil prices were also impacted by the ongoing supply glut as Saudi Arabia and Russia feud over whether or not to make production cuts. The Energy Select Sector SPDR (NYSE: XLE) dropped 50.5% during the first quarter and that was by far the worst performance of all the sectors.
The second worst performance came from the financial sector as the Fed cut interest rates twice during the first quarter in order to try to limit the virus’ impact on the U.S. economy. When interest rates are falling the margins for banks tend to contract and it hurts their profitability. The Financial Select Sector SPDR (NYSE: XLF) was down 31.78% during the first quarter. From February 19 through the end of the quarter, the XLF fell 36.67%. The first emergency rate cut came on March 3 and then made another cut on March 15.
The tech sector was the top performer during the first quarter with the Technology Select Sector SPDR (NYSE: XLK) losing 11.87%. The XLK was up 12.13% through February 19, but then fell 25.15% from February 19 through March 31.
After the tech sector, the defensive sectors were all lumped together with losses between 12.62% and 13.39%. When I say defensive sectors I am referring to healthcare, consumer staples, and utilities. The Utilities Select Sector SPDR (NYSE: XLU) was the second best performer through February 19, but the Healthcare Select Sector SPDR (NYSE: XLV) and the Consumer Staples Select Sector SPDR (NYSE: XLP) were both lagging the overall market through February 19. In the second part of the quarter, the XLV and XLP both held up better than the overall market.
For the second half, or the second phase of the first quarter, the XLV was the top performing sector with a loss of 14.45% and the XLP was the second best performer with a loss of 15.05%. The S&P fell 23.37% from February 19 through March 31.
What does all of this mean going forward? If the market and the economy continue to struggle, like I think they will, you would be best served having less money in stocks than usual for the foreseeable future. The defensive sectors are probably safer at this point, at least until the economy can get back on track and I don’t see that happening this year.
I think China is an interesting play at this point. Because their market held up better than others to start with, and because they are further along with recovering from the virus, China could be ahead of the rest of the world in economic terms for the next few quarters. It will be worth watching their economic reports to see how bad it was in terms of first quarter GDP and so forth. That may give us some idea of what we should expect for other parts of the world, including domestic economic activity.