It would be easy to look at some data from the third quarter and mistake it for a period of blithe recovery. Covid-19 fatalities moderated in the US, while business confidence returned. Longdated inflation expectations approached the Federal Reserve’s benchmark near 2%. The MSCI World Index gained close to 8%, while high yield bond spreads tightened by approximately 100 basis points. Under the surface, however, the situation was more complex.
The emergence of the novel coronavirus and the economic impact of efforts to contain its transmission led to a deep, sharp repricing of risk assets during the first quarter as liquidity concerns emerged across financial markets. The first-quarter market rout began as a typical flight to safety, with risk assets declining sharply while traditional safe havens rallied.
After the very substantial decline of US equities in the first quarter of 2020, stocks rebounded in the second quarter—a pattern consistent with earlier recessionary periods. The strength of the equity market recovery in the face of increasing daily cases of Covid-19 surprised many commentators.
In the second quarter of 2020, the high yield market recouped much of the steep loss it had suffered in the first quarter of the year. The turning point for the market appeared to be the Federal Reserve’s March announcement that it would take aggressive measures to counteract the economic effects of the Covid-19 pandemic.
The price of gold was volatile in a momentous first quarter that saw both the emergence of a global health crisis and a significant correction in global equity markets, though the metal very much served its purpose as a potential hedge against extreme outcomes.