Market Update: March 20 – 27, 2020 (US)

Another week, another set of records. The week ending March 27, 2020, saw equities post their biggest weekly gain (10%) since 2009 (measured by the S&P 500), biggest three-day surge (21%) since 1931, and the largest one-day increase (11%) since 1933 measured by the Dow Jones Industrial Average. Continue reading the article below to learn more.

Across financial markets, the environment was comparably less stressed than the week before and this was evident by moves in several markets. Investment grade credit and high yield credit spreads declined by 55bps and 92ps, ending the week at 275bps and 921bps respectively. The CBOE Volatility Index (VIX) was flat, averaging 63% for the week, coming down from over 70%. US government bond yields fell across the curve. Two-year yield fell 8bps, 10-year yields fell 16bps, and 30-year yields fell 14bps. The US dollar fell 4.3%, measured by the DXY Index.

What drove this reversal in risk sentiment? It certainly was not the economic data. Initial Jobless Claims surged to over three million, the biggest weekly increase ever. This is the beginning of the deterioration of economic data, and much is expected. What did drive the reversal in sentiment were two large actions. First, on Monday morning the Federal Reserve announced unlimited Quantitative Easing (QE), promising to buy unlimited amounts of Treasury bonds and mortgage backed securities. It also pledged to buy corporate bonds, municipal bonds, and announced other new targeted programs to ensure credit continues to flow. Second, Congress agreed to a $2 trillion fiscal package— approximately 10% of GDP—to aid the US economy. The package included direct payments to residents, extended unemployment benefits, financing for companies to keep workers employed, and aid to specific industries. While the Fed’s action helped alleviate stress in funding markets, the fiscal package was the main driver behind record-breaking moves in the equity markets.

Beyond financial markets, the virus continues to spread. New York remains the epicenter of the outbreak in the United States, although there are signs that social distancing measures are starting to slow the tide of patients requiring hospitalization. Around the world, the lockdowns continue in Europe and other parts of the world, India – a country of 1.3 billion people, announced a mandatory 21-day lockdown for the entire country. China is beginning to get back to work but has announced travel restrictions to prevent importing the virus and creating a second wave of infections.

What do we not know? What do we know?

There continues to be large and important facts that remain unknown:

  1. How bad the pandemic is (due to a lack of testing).
  2. How severe restrictions on economic activity will be.
  3. How long the restrictions will last.
  4. When the virus will stop spreading.

We do know that the virus is continuing to spread, and the news is likely to get worse before it improves. Restrictions on activity will cause severe economic pain around the world and in the U.S., which is shown through the massive rise in workers claiming unemployment benefits. We know that the uncertainty around the situation remains extremely high. The trading environment continues to be challenged as liquidity in financial markets has fallen.

What this means is that volatility in asset prices will continue in the near-term. Expect to see more of the past week going forward. When the uncertainty sub-sides, opportunities will emerge driven by dislocations in financial markets.

Opportunities right now? 

Currently, the environment is extremely volatile and fluid, which limits widespread opportunities and risk-taking. But some of our long-standing opportunities remain attractive, and new opportunities are surfacing.

First, the large drop in government bond yields means that some profit-taking is warranted. We would be sellers of government debt to fund other opportunities.

Second, buying equities to move from underweight to target weight is appropriate. But we would not be moving back all the way to target immediately.

Third, owning idiosyncratic strategies that capitalize on dislocations or attractive pricing remain interesting. Right now, these include bank capital relief, insurance linked securities, and some event-driven and credit strategies.

Fourth, the governance structure of institutional investors will influence how successful they are able to capitalize on the opportunities coming out of the dislocation. Having an “Opportunity Allocation” may be increasingly attractive. An Opportunity Allocation is not an investment in and of itself; rather, it is an asset category written into the investment policy statement to allow investments that don’t fit into other categories. It’s usually designed with a 0% target allocation and a maximum of 10%. Adding one to the investment policy could allow greater flexibility to pursue interesting opportunities.

What do we recommend right now? 

Corporate Defined Benefit Plans

For most defined benefit retirement plans the market environment has led to funded status dropping. Consider the following to capitalize on the current and forthcoming environment.

  • Rebalance: Review your Investment Policy Statements to determine whether you should re-risk the glide path (i.e. increase the target allocation to return-seeking assets). Even if the Investment Policy Statement does not allow for re-risking the glide path, it may still be necessary to increase the actual allocation to return-seeking assets to get closer to an unchanged-target allocation.
  • Reduce duration: Investigate if the current ultra-low interest rate environment represents an opportunity to reduce the interest rate hedge ratio in order to improve funded status as interest rates rise. Current risks are skewed to higher rates, which benefits plans with unhedged interest rate risk.
  • Contributions: The stimulus bill (“CARES Act”) allows deferral of contributions due in the calendar year 2020. Consider taking advantage of that.
  • Fixed Income Manager Guidelines: Review guidelines for active investment grade fixed income managers to reduce the need to become a forced seller of downgraded securities, as there is likely to be a wave downgrades in the coming months, and it may work to your advantage to not be a forced seller of these bonds. This could be relevant for many investor types, but it could be most important for corporate defined benefit plans with sizable allocations to liability-driven investment strategies.

Defined Contribution Plans

For sponsors of defined contribution retirement plans, times of market volatility often raise questions regarding what steps, if any, plan sponsors should be taking. Consider the following:

  • Plan Design: Consider whether your investment option lineup provides participants with ample flexibility to diversify in market downturns.
  • Administration: Verify that your administrative recordkeeper’s website and call centers are fully operational and not experiencing significant disruptions.
  • Regulatory Changes: Make sure your plan can administer the new rules in the stimulus bill, such as more flexibility for loans, early withdrawals, and required minimum distributions.

Non-Profit Investors

In addition to the market environment, many non-profit organizations are operating in extremely challenging environments now. Universities have shut down and moved to online learning, healthcare systems are on the front lines of preparing for the possibility of a mass influx of COVID-19 patients, foundations are responding to their grant recipients many who are already in very needy positions, and faith-based institutions have been asked to shutter for a while. We have some broad thoughts for the long term, total return asset pools (i.e. endowment, foundation, operating):

  • Enterprise Risk Management: Be mindful of all the different facets of potential liquidity squeeze across the portfolio and enterprise. At the portfolio level (i.e. private investment capital calls), at the market trading level, and at the enterprise level.
  • Governance: Stay the course towards the long-run goal and ensure the oversight procedures have built-in flexibility to accommodate near-term disruptions in market and asset class relationships.
  • Opportunities: If you have ample liquidity, expect to see interesting opportunities in public and private markets.


For public pension plans, the recent market environment has shrunk asset values, particularly in publicly listed securities. For these plans, we recommend the following actions.

  • Liquidity: Reviewing the amount of liquidity relative to the net cash outflows. Be cognizant of whether the economic environment will change the expected contributions, and how that could impact liquidity, particularly the relationship between public and private asset liquidity.
  • Opportunities: If you have ample liquidity, expect to see interesting opportunities in public and private markets.


For Taft-Hartley Plans, the recent market environment has shrunk asset values, particularly in publicly-listed securities. For these plans, we recommend the following actions.

  • Liquidity: Add to liquidity buffers for pension plans to prepare for lower contributions. Individual plan circumstances should dictate how much, but perhaps doubling typical cash balance is a good rule of thumb.
  • Opportunities: If you have ample liquidity, expect to see interesting opportunities in public and private markets.

Health and Welfare

Health and welfare plans, which have wide variations in funding levels and sources.

  • Liquidity: Review whether to add a liquidity buffer, perhaps to prepare for lower contributions and/or increased cash outflow. Individual plan circumstances should apply.

Past Performance is no guarantee of future results. Indices cannot be invested in directly. Please refer to Disclaimer for Index Definitions and other General Disclosures.

Market data sourced from Factset
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.


Index Definitions

  • U.S. dollar index (DXY) - is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners.
  • VIX Index- Represents short-term expectations of investors regarding the market, using the implied or perceived volatilities of a range of stocks from the Standard & Poor’s 500 Index. The index is calculated from the number of “call” and “put” options present in a period.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Investment advice and consulting services provided by Aon Investments USA Inc. (Aon Investments). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.

This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on Aon Investments understanding of current laws and interpretation.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Investments preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Investments disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Investments reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Aon Investments.

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