COVID-19 Market Update: March 12, 2020

We are in one of those trying times that we all wish didn’t happen as today we watch the markets continue to decline. Coronavirus (COVID-19) has been declared a pandemic by the World Health Organization, and the reactions to the virus have caused the financial markets to take a big hit. We want to give you some quick updates on what is happening in the markets, what we are doing in light of the markets, and what you can do in response.

What is Happening in the Markets

Of course, no one could have foreseen the impact of COVID-19 on the markets, and for those of us in energy-related areas or businesses, we also have the emergence of the Russia/Saudi oil to make things more challenging. Here are some quick updates on what is happening:

• Believe it or not, US stock markets and most Global markets are still up over the last year through yesterday. Almost hard to believe given recent market downturns. Through yesterday’s close, the S&P 500 was down about -14.83% YTD and international markets were down -17.37% YTD (MSCI ACWI x-USA). This follows an incredibly strong 2019 that had domestic markets up 31.02% and international markets up 21.51%.

• Since March 12, 2019, the US 10 Year Treasury Yield has moved from 2.61% to 0.67% with about half of this move occurring in February of this year. On March 9, this yield temporarily hit 0.318% in early trading (record lows!)

• Global credit is up 3.23% year to date as of yesterday’s close (Bloomberg Barclays Global Agg) with the 10+ Year maturity sleeve outperforming the 1-3 Year sleeve up 7.39% over the 1.03% of the 1-3 Year. Longer duration securities have outperformed shorter duration as benchmark rates and yields have fallen. The opposite was true last year as the Fed was raising rates.

• The US Large Growth vs Small Value valuation spread continues to widen. As of this morning, Large Growth was up 8.54% over the last year while Small Value was down -26.69%! Numbers are similar over a 3-year period (LG +14.14%, SV -10.63% annualized). This is one reason why rebalancing is a consideration.

What We Are Doing

We view market downturns as opportunities to capture tax losses and rebalance into assets that have declined disproportionately. This is what we are doing in response to the market decline:

• We are still pursuing targeted strategies and allocations for each account. We don’t try to forecast markets in the short term. Client portfolios are designed across time horizons that contemplate ups and downs. Our objective is to unemotionally pursue the strategy as designed.

• We are making sure each investment is performing as expected. We don’t need managers wandering away from the strategy. We need them to play the role they were engaged to play. So, we are reviewing the performance of each manager vs expectations.

• We are still keeping a global perspective on equity allocation. Valuations overseas are generally lower than US and historical returns for international and emerging markets have exceeded those in the US. We discuss six reasons for keeping a global focus in a previous blog: Why Should I Invest Globally?

• We are still looking at ways to reduce overall market exposure. We are considering opportunities such as interval mutual funds and private investments, particularly with such low yields on fixed income, which allow access to diversifying opportunities.

• We continue to avoid “risky” or volatile strategies like MLPs and High-Yield bonds. Seeing the disastrous performance of these year-to-date reminds us why we will continue to avoid these riskier assets and not chase “yield.”

What You Can Do

• Remember markets recover. An article from CNBC Markets reviewed market corrections and “bear markets” since World War II. While history may not repeat itself, the average recovery from a bear market has been 24 months and the average recovery from a correction has been 4 months.

• Stay invested. There are numerous studies that show trying to time the market is a fool’s game. It’s been best to have a strategy and stick with it.  In a piecefrom Investor’s Business Daily, the data shows that cashing out puts you at risk of missing the best market days, ultimately resulting in a worse return than you would have experienced staying invested through the bad days. “You're likely to miss the typically unpredictable starts of each new run up in the market. Those tend to be among the market's best days. The price for missing out is that your total returns suffer.”

• Keep your eyes on the right investment horizon. With a significant increase in daily volatility, it is easy to get queasy. However, most of us really don’t care what happens on any particular day. What matters is in the future, whether 5 or 30 years. Keep focused on that and the ride will seem smoother!

• Keep a good perspective on COVID-19. This data and set of charts from Information Is Beautiful is actually quite calming.

If you have any questions, please give us a call.