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CPWM Market Update – 3/6/2020

With the sharp daily movements in the equity and bond markets, we are closely watching the news and the development of the COVID-19 globally.

As we’ve seen during the last few days, headlines are becoming a true market risk. Investors are acting out of fear and creating big intra-day market swings. With this in mind, we feel like it’s our duty to maintain a long-term perspective in line with clients’ specific plans, shed light on recent events and to restate our belief that acting on headlines can lead to poor performance and increased risk.  As a summary:

  • The S&P 500 sold off a little more than 10% from the all-time high on February 19th, 2020 through the end of trading on March 5th, 2020.
    • Although that seems like a big sell-off it only pushes us a few months back, to October 2019, which erases 4 months of gains.
  • The 10-year Treasury note fell to an all-time low on Thursday as fears of coronavirus spreading through the world sparked fresh bids for U.S. debt at the expense of riskier assets like stocks.
    • That means Bond holdings are increasing in value with increased volatility, protecting the downside of clients’ portfolios, and providing income and principal stability.
  • Expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy.

In US dollars. Past performance is no guarantee of future results. Declines are defined as months ending with the market below the previous market high by at least 10%. Annualized compound returns are computed for the relevant time periods after each decline observed and averaged across all declines for the cutoff. There were 1,127 observation months in the sample. January 1990–present: S&P 500 Total Returns Index. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

We can’t tell you exactly when things will turn or by how much, but we believe that staying invested through these tougher times will be rewarded with positive expected returns. These lessons have been learned in past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of other market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom, picking the fastest lane is a stressful guessing game. Likewise, trying to anticipate movement of the market adds to anxiety and undue risks.

Chart end date is 12/31/2019, the last trough to peak return of 451% represents the return through December 2019. Bear markets are defined as downturns of 20% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved

The chart above illustrates the historical performance of the S&P 500 Index, highlighting periods when the market was rising and falling. We can see from the chart that good times for the market have been disproportionately longer than the bad times, and the duration of the bull run is not a useful indicator of future performance.

We expect markets to be volatile and we allocate with that in mind. Our team seeks to build portfolios that can withstand market volatility and uncertainty and protecting the downside. This is the approach we’ve taken with all the clients we advise and we think that looking at the big picture and planning for the long-term should not be influenced by short-term events. Looking beyond the headlines, building diversified portfolios and staying invested is what we strongly encourage and believe in.

If you have any questions, please do not hesitate to reach out and speak with us.