It’s not news to anyone that the first half of 2020 has been marked by extreme volatility. Of course, I am referencing stock market volatility; but in addition to the market, our reactions have been challenged in almost every aspect of life. We had to pivot quickly and react to changes in the way we manage our businesses, how we communicate with one another, how to balance work and school schedules and even the way we purchase goods and services. The health and safety of ourselves and our loved ones has been the overarching theme. And at Fragasso, the health of our clients’ financial well-being has remained paramount.
“What happens is not as important
as how you react to what happens.”
WHERE DID IT ALL BEGIN?
The equity markets started off 2020 continuing their torrid uptrend from the prior year with the S&P 500 up 5% through February 19.1 Equity market weakness from the new coronavirus was initially isolated in Asian countries but quickly spread to Europe and the U.S. as outbreaks of cases grew exponentially. On February 19, 2020, stocks in the U.S. began to react to the spreading coronavirus and began a precipitous decline which would soon become the fastest bear market in history, defined as a decline of more than 20% in equities. It took only 16 trading days for stocks to enter bear market territory, with the S&P eventually bottoming on March 23, 2020 giving up 34% from its peak in February. For context, it took nearly 6 times as long for the market to breach 20% in 2008.2 The speed and magnitude of the equity market decline did not leave investors with much time to step out of the way.
Preparation and planning were therefore essential to position portfolios for that environment. Ensuring that portfolio’s fixed income holdings were high quality and uncorrelated to equity markets was of paramount importance as most sectors within fixed income were also unable to avoid the carnage of March. Additionally, periods of excess volatility allow investors to take advantage of taxloss harvesting opportunities, which we did throughout the month of March.
WHERE DO WE GO FROM HERE?
The world has certainly changed, and there are a lot of questions as to the lasting impacts Covid-19 will have on businesses and the economy, especially when we look a few years out. When living through a pandemic it may seem that our preconceived notion of “normalcy” may forever be altered. However, as people we are naturally inclined to have short-term memories. If a vaccine is produced, or if enough people develop antibodies or testing becomes readily accessible, then possibly our lives will look similar to how they were in 2019. But undoubtedly certain things will change, even if just on the margin. Thus, we believe the following will likely play out over the foreseeable future:
- Lower interest rates for longer: With the majority of U.S. Government bonds yielding less than 1%, investors need to think outside of the box in order to generate suitable returns within the fixed income portion of portfolios while also protecting assets from equity market declines.
- Large over small: Larger companies, in aggregate, have better balance sheets, more stable cash flows and are better suited to use their scale to weather this economic downturn than their smaller company peers. There is no doubt that small companies will have their day in the sun, but we believe larger companies offer a better risk/reward profile going forward.
- Growth over value: For nearly a decade, growth stocks have outperformed value companies, a shocking reversal from the 30 years prior to the Global Financial Crisis where value stocks reigned supreme. But in an environment where GDP growth is structurally lower, investors tend to reward those companies who are still able to grow earnings at an above average rate. This is a trend that we believe will persist in the years ahead and why we’ve increased exposures to these companies.
Being able to adhere to having a long-term view is often challenging for investors. Though much of the economic data we are witnessing today are as harrowing as any since the Great Depression, we believe markets have the ability to remain resilient. Given the amount of stimulus that has been injected into economies by governments and central banks around the world, stock markets will likely recover much quicker than the underlying economy.