EQUITY COMMENTARY

The S&P 500 closed the first quarter of 2020 down 19.6%, its worst three-month start to a calendar year on
record. After closing at record highs on February 19th, the S&P ended March 23.5% below the all-time high
levels. The magnitude and speed of the sell-off was unprecedented as investors quickly wrestled with the reality
that COVID-19 was more than a temporary disruption, but rather a global pandemic where nearly a quarter of
the US economy had an immediate shutdown. The S&P 500 is market cap weighted and thus fared much better
than the average stock. The equal weighted S&P 500 index fell 26.7% during the first quarter. Mid-cap and
small cap indices were down even further, falling 30% and 32.6% respectively. Thus, the best protection during
the first quarter was exposure to mega-cap technology companies such as Amazon, Apple, Google, Facebook,
and others which acted as a safe haven. Markets rebounded during the final week of March as the Federal
Reserve brought actions on an unprecedented scale to combat the disruption including a promise to buy
unlimited amounts of investment grade corporate bonds. Investors believed that this took the “left tail” scenario
off of the table and likely prevented a further downward spiral of financial asset prices. Indeed, the Federal
Reserve’s balance sheet grew from $4T to over $6T in a matter of weeks as the Fed purchased mortgages, US
treasuries, and now corporate bonds. Currently, the market appears to be pricing in a situation of the “haves”
and “have nots”, favoring higher mega-cap companies with strong balance sheets and the ability to survive the
pandemic. Meanwhile, small companies and larger cyclical firms are still down substantially from the highs as
investors try to price in the downside risks.