Fair to Middlin

As I was writing this yesterday morning, major market indexes had opened way down on virus anxiety and the relationship complexities between oil producing countries. So-called circuit breakers set to briefly halt trading during times of market stress had been tripped. Recession fears had quickly been rekindled amid an otherwise strong economy. In short, it was a “wheels are coming off” kind of Monday.

After a day like that, not to mention the past couple of weeks, the reasonable question is what on earth are we going to do about it? The answer, as you can probably imagine, is that we’re going to follow our plan. We’re going to focus on controlling what can be controlled. And we’re going to remain rational even as a growing number of people around us seem to be, well, losing their minds just a little bit.

What does this actually mean for your investments? What follows mostly applies to those clients who trust me to manage their investment accounts.

As we’ve discussed previously, we’ve positioned your portfolio to be diversified and, based on your plan, to be able to weather market craziness. This doesn’t mean you’ll experience none of the market’s downside. We all know that’s not possible when we’re also trying to get the upside.

Instead, your market exposure becomes a matter of proportion. If, say, the stock market falls by 10% and your portfolio has 60% of it’s money in stocks, you’d expect to fall by about 6%. Diversification and portfolio construction can help push these numbers a bit in your favor, going down even less and rising a little more, but there’s no free lunch here. I know you know that, but it’s helpful to remind ourselves at times like these, right?

What also helps is the other 40% (or whatever your portion is) being invested in “core” bonds. These are primarily Treasury bonds issued by the government and other bonds issued by high quality companies. Now, investors fearfully selling stocks often flock to bonds, but the buying in the past few weeks has been pretty extreme. Core bonds are up over 6% so far this year, well beyond typical expectations.

Bond prices have risen so much that yields (the implied investment return for new buyers) have hit historic lows almost daily for the past couple weeks. Every Treasury bond from one month out to 30 years yielded less than 1% yesterday and the 10yr Treasury, a key benchmark, fell to less than half that. Would you lend the government money for 10 or even 30 years for that piddly amount of interest? No way. You’d only buy bonds like that out of fear, or perhaps because you’re an institution and simply must put your cash somewhere. In short, panic selling of stocks begets panic buying of bonds.

The combination of stocks falling while bonds are rising means that, proportionally, your returns are better than the stock market over the past several weeks. We’ve made assumptions about this relationship within your plan and have stress-tested various “bad” scenarios as well.

The following examples are from a typical client’s actual experience during the month of February and the first week of March. You’ll see how the green line (the client’s portfolio) hovers within the other colors (each of which is a market index). Essentially, this is what we’re shooting for over the long term and during nasty phases like the one we’re in now. The adage about investing being a marathon (even an ultramarathon where the middle is a great place to be) and not a sprint absolutely holds here.

This is important because the economic outlook is evolving rapidly. Several analysts, including my research partners Bespoke Investment Group, are now calling on the powers that be to provide immediate economic stimulus to avoid a recession this year. This abrupt change to the outlook was brought on by continued fears of contagion, both literally regarding the coronavirus and figuratively regarding economic impact from our neighbors’ actions (or inaction) to avoid it. Recent moves by OPEC and Russia that are driving down the price of oil don’t help the mood either.

So unfortunately, this kind of volatility could persist while these issues shake out. In the meantime, I’ll stick to our plan and manage your portfolio accordingly. This can, and probably will, include some buying of stocks assuming they fall sufficiently. This isn’t an exercise in trying to “time” markets but is part of my disciplined rebalancing process.

Have questions? Ask me. I can help.