Ivy Market Insights – First Quarter 2020 review

04.07.20

Ivy Market Insights – First Quarter 2020 review

Commentary as of April 06, 2020

As fundamental investors, we make decisions based on analysis of the present opportunities. These recent weeks, it seems we have been digesting information from a fire hose, processing short-term information flow. We have framed the current environment on three pillars.

First is the health impact. There is speculation the trajectory of the number COVID-19 cases may hit an apex or plateau soon. The shape of the curve is a key component, but not singular and an apex is a necessary, but an insufficient signal. While this is encouraging news, it doesn’t mean we should jump in with both feet and buy the market hand over fist. Therapeutic breakthroughs could also increase confidence.

The next pillar is the macroeconomic impact, which is the real issue for investors. The self-imposed social distancing is driving the slowdown in economic activity. There have been approximately 10 million unemployment claims over the past two weeks and that will continue to climb. The shutdown is unprecedented due to its global nature, and we expect multiple apexes or rolling apexes of the COVID-19 curve, it will not be a singular event. As we get better science and operational practices around managing the curve, the question we need to answer is not if, but when will we lift the social distancing measures. We go back to the classic lens of normalized earnings power that tells us what to pay for a business.

Lastly, there is the market impact. This current period of extreme volatility reflects the general sense of uncertainty in the economic path forward.

COVID-19 IMPACT ON KEY MARKETS
Index Peak date Bottom date Peak-to-Trough
Drawdown
YTD

S&P 500 TR USD

02/19/20

03/23/20

-33.8%

-19.6%

Russell 1000 Growth TR USD

02/19/20

03/23/20

-31.5%

-14.1%

Russell 1000 TR USD

02/19/20

03/23/20

-34.6%

-20.2%

Russell 1000 Value TR USD

02/12/20

03/23/20

-38.3%

-26.7%

Russell Mid Cap Growth TR USD

02/19/20

03/23/20

-35.7%

-20.0%

Russell Mid Cap TR USD

02/20/20

03/23/20

-40.3%

-27.1%

Russell Mid Cap Value TR USD

02/20/20

03/23/20

-43.7%

-31.7%

Russell 2000 Growth TR USD

02/19/20

03/18/20

-40.4%

-25.8%

Russell 2000 TR USD

01/16/20

03/23/20

-44.7%

-35.7%

Russell 2000 Value TR USD

01/16/20

03/23/20

-44.7%

-35.7%

MSCI World NR USD

02/12/20

03/23/20

-34.0%

-21.1%

MSCI ACWI NR USD

02/12/20

03/23/20

-33.7%

-21.4%

STOXX Europe 600 NR USD

01/17/20

03/23/20

-35.7%

-24.3%

MSCI EAFE NR USD

01/17/20

03/23/20

-33.9%

-22.8%

MSCI EM NR USD

01/17/20

03/23/20

-33.7%

-23.6%

Source: Morningstar and Ivy Investments. Data also show performance of multiple equity indexes on year-to-date as of March 31, 2020 and peak-to-trough bases. Past performance is not a gurantee of future results

The old adage that “history doesn’t repeat, it rhymes” is in line with our thinking. Looking back at U.S. recessions since the 1940s, the typical recovery from recessionary troughs lasts around 11 months, with a normal range of eight -18 months. We expect an extended period of uncertainty and volatility in the markets as new information becomes available.

Unlike previous recessionary periods, we had an economy performing at record pace before the virus. We believe the underlying fundamentals could be in very good form to rebound when we get back to work and return to more normalcy. As active investors, we are looking bottom-up business by business, and now is the time to be a bottom-up active manager. Our end goal is to determine the long-term earnings power of companies that may be impaired by the current environment but could be taking actions to improve their business models.

We will provide a more in-depth perspective that focuses on Ivy’s market and economic outlook for second quarter 2020 in the coming days.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: Investment return and principal will fluctuate, and it is possible to lose money by investing. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market.

The S&P 500® Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. The Russell 1000® Index is a subset of the Russell 3000® and includes approximately 1,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the large-cap growth segment of the U.S. equity universe. The Russell 1000® Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap segment of the U.S. equity universe. The Russell 1000® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the large-cap value segment of the U.S. equity universe. The Russell Midcap® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell Midcap® Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the mid-cap value segment of the U.S. equity universe. The Russell 2000® Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® Growth Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell 2000® Value Index is a float-adjusted market capitalization weighted index that measures the performance of the small-cap value segment of the U.S. equity universe. The MSCI World Index captures large and mid cap representation across developed markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI ACWI Index captures large and mid cap representation across developed markets and emerging markets countries. The STOXX Europe 600 Index is a float-adjusted market capitalization weighted index that measures the small-, medium-, and large-capitalization companies of 17 European countries. The MSCI EAFE Index is an equity index which captures large and mid cap representation across developed markets countries around the world, excluding the US and Canada. The MSCI Emerging Markets Index captures large and mid cap representation across emerging markets countries. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.