To Our Shareholders:
CGM Mutual Fund decreased -27.8% during the first quarter of 2020 compared to the Standard and Poor’s 500 Index (S&P 500 Index) which decreased -19.6% and the ICE BofAML U.S. Corporate, Government and Mortgage Index* which increased 3.3%.
Markets were routed in the first quarter of 2020 in response to the outbreak of the novel coronavirus, as well as unprecedented efforts to contain the spreading pandemic and its debilitating effects on the global economy. However, prior to the emergence of the coronavirus, improving geopolitical conditions and encouraging domestic economic indicators largely pointed to a solid start to the year for U.S. stocks. The Labor Department reported a strong finish to 2019 as U.S. employment increased for the tenth straight year. Employers added 145,000 jobs in December and the unemployment rate remained at a 50-year low of 3.5%. Low unemployment coupled with historically low mortgage rates boosted residential construction and the Commerce Department announced that housing starts jumped 16.9% for the month of December to their highest level since 2006. In early January, the U.S. and China diffused a two-year trade war that had unsettled markets and dampened global growth by entering into a phase one trade agreement. Importantly, the agreement provides for enhanced protections for trade secrets and intellectual property and the further opening of the Chinese market to foreign firms which should lead to increased sales of U.S. goods and services in China. The agreement also provides for a reduction in tariffs on approximately one quarter of Chinese goods imported into the U.S. and a commitment from China to purchase up to $200 billion of U.S. goods. At the end of January, the Commerce Department reported a moderate 2.3% increase in U.S. GDP for 2019 as growth continued to be sustained by U.S. consumer spending.
In February, as fears of the spreading coronavirus pandemic mounted and businesses ceased operations amid lockdowns and quarantines around the world, economic activity sharply contracted. By the end of the month stocks were in correction territory after suffering their worst week since the financial crisis of 2007 - 2009. When the U.S. market opened on March 9, stocks quickly dropped 7% to trigger the first 15-minute circuit breaker halt in trading in 23 years. The S&P 500 lost 7.6% for the day and the Dow Jones Industrial Average lost more than 2,000 points in one session for the first time in history. On March 12, the S&P 500 fell an additional 9.5% into bear market territory to end the historic bull market run that began in March 2009. The threat of recession in the U.S. and the global economy increased and oil prices also entered a bear market as demand for gasoline, diesel and jet fuel plunged. The drop in the price of oil intensified when the four-year collaboration between OPEC and ten non-member nations abruptly disintegrated in response to bickering between Saudi Arabia and Russia on production cuts. Perversely both countries vowed to increase production, flooding the market with oil and sinking the price of the global benchmark Brent crude to $22.74 a barrel, a drop of 65% for the quarter. The impact of a pandemic, exacerbated by an oil price war, led to historic volatility in stock prices through the end of the quarter.
In emergency meetings on March 3 and March 15, the Federal Reserve Board reduced interest rates by 0.5% and then to near zero in an effort to lessen the impact of the economic shutdown and stabilize the market. The Fed also injected over $1.5 trillion into the U.S. short-term funding market and initiated a new quantitative easing program under which it initially planned to purchase $500 billion in treasury securities and $200 billion in mortgage-backed securities. The Fed subsequently amended the plan to make those purchases open-ended. Central banks around the world followed suit with emergency measures of their own to shore up the global economy. In late March, the U.S. government enacted the largest economic relief package in history, totaling over $2 trillion. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act includes direct payments to Americans, expanded unemployment insurance, loans to large and small companies, financial assistance to states, and assistance to health-care providers. Stocks surged in anticipation of the passage of the Act but then pulled further back at the end of March with the S&P 500 suffering its worst quarterly decline since 2008.
Chronically subdued inflation constrained treasury yields leading into the new year. The 10-year U.S. Treasury bond yield was 1.9% at the start of 2020, then dropped to an all-time low of 0.5% on March 9 and finished the quarter at 0.7%. Uncertainty about the expanding coronavirus pandemic and the attending slowdown in global economic activity diverted investments away from stocks to the safety of U.S. Treasuries and led to the steepest quarterly decline in the 10-year U.S. Treasury yield since 2011. The S&P 500 was priced at 23.2 times the trailing twelve-month earnings at the end of the quarter. While we anticipate continued market instability until the coronavirus pandemic abates and economies gradually return to normal operations, we also recognize the potential for significant opportunities in undervalued stocks.
On March 31, 2020 CGM Mutual Fund was 27.2% invested in short-term U.S. Treasury Notes. The three largest industry positions in the equity portion of the portfolio were in housing and building materials, drugs and computer software and services. The Fund’s three largest equity holdings were Philip Morris International Inc. (PM, Financial) (beverages and tobacco), AbbVie Inc. (ABBV, Financial) (drugs) and PennyMac Financial Services, Inc. (PFSI, Financial) (financial services).
David C. Fietze
President
April 1, 2020
*The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by Capital Growth Management Limited Partnership. ICE Data and its Third Party Suppliers accept no liability in connection with its use. See prospectus for a full copy of the Disclaimer.
The performance data contained in the report represent past performance, which is no guarantee of future results. The table above does not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares and assumes the reinvestment of all Fund distributions.
The investment return and the principal value of an investment in the Fund will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.
