Grant Dorhout

The Coronavirus and the Market

An Analysis: The Coronavirus and the Market
The markets have shifted somewhat rapidly as of late and we understand that you may have questions about how to respond to market volatility. Although the media likes to attribute this volatility to one cause, we feel that short-term declines are not the result of a single factor. Just because markets pull back, it doesn’t mean that you should do something differently. With that being said, we wanted to provide some additional commentary around our portfolios. We want to take this opportunity to reinforce several key investment principles that drive our investment strategies. Our management philosophy is not designed to shift or change in light of market volatility. Conversely, our management philosophy strives to mitigate and manage market volatility. The following is a summary of certain items that should be kept in focus:
  1. Diversification is Working. We believe that extensive, true diversification is one of the foundational strategies that can be deployed to help maximize risk-adjusted returns. Many investors are “diversified” in a way we feel may create missed opportunities or increased risk that we attempt to mitigate through truly diversified portfolios. Many foreign equities, bonds, hard assets, and hybrid securities have declined less than US equities. US stocks have been the top performing asset class for years, so it shouldn’t come as a large surprise that they have been one of the most volatile markets during this recent decline. But again, many diversified investors have experienced much less drawdown of returns compared to the broad US stock markets over this period of volatility.
  2. Historic Drops, Historic Rallies. This is a concept that has been discussed for decades. Stocks generally produce positive performance more than they produce negative returns for clients and evidence has shown that after large pullbacks, stocks often rally. This isn’t to say that equities won’t fall further, but history has shown us that equities are resilient. We don’t believe in timing markets because again, there is no evidence suggesting that short-term market volatility is sustainably predictable. We need to have confidence in our financial plan and portfolio positioning, without making rash decisions that can lead to missed returns or increased risk of loss.
  3. Disciplined Rebalancing. Rebalancing is not designed to improve returns but rather, it strives to reduce risk. Our threshold-based rebalancing approach is systematically applied on a weekly basis across our managed accounts. This process seeks to identify which holdings have materially appreciated or depreciated away from our intended target allocation. The goal of this process is to buy low and sell high. These types of risk management techniques can potentially add significant value and reduce risk over the long-term.
  4. Equity Market Fundamentals. Market performance is a leading indicator to the health of our overall economy. Investors set stock market pricing based on their expectations of future events. As a result, markets are volatile since expectations are deeply connected to human behavior and emotion. Yet we feel that certain themes drive equity market returnsand should be considered. First, corporate profitability has been strong and is attractive from an investment perspective. Second, dividend yields have been rising over the years which to some degree supports rising equity prices. Third, interest rates are low and believed to move lower, which generally supports economic growth. Fourth, with unattractive bond yields, there is not significant ”competition” for stocks. These themes have not changed during the recent volatility. Therefore, we have not had a change of perspective on our outlook for stocks. This is not to say that equity markets have no risk of decline. But again, we believe there are many key fundamental reasons to remain positive on equities.
We invite your questions as our goal is to give you confidence in your portfolio, and more importantly, confidence in the investment team and philosophy that guides the portfolio management process. We value your trust and partnership, and appreciate the opportunity to help you achieve your financial goals.