Charter Oak strives to provide clarity and perspective to its clients. Our goal in this communication is to provide a historical context to current events as a way to find true north and our path forward together.
Many investors are wondering what lies ahead as we continue to address the impact of the COVID-19 outbreak.
Markets are facing two unknowns: the first is the physical health of populations, the other is the economic impact of staying in place. As these questions remain unanswered, market volatility presents itself with higher than normal swings in prices of stocks around the world.
History tells us that not all sharp periods of decline are created equal and that the trigger of the market sell-off can tell us a lot about what to expect. Event-driven market declines have not lasted as long as those that are caused by structural or cyclical landscapes.
Types of Market Declines and Their Triggers
Structural: The result of the market having a systemic problem, such as over-leveraged banks or consumers (like 2008 and 1929).
Cyclical: A natural slowdown in economic activity after a period of growing production and profits. This type of decline is actually a bear market inside of a bull (like 2001 and 1991).
Event-Driven: An unpredictable shock to the markets, such as a natural disaster or health crisis, as we are currently experiencing.
While information continues to cross the airwaves, recent comments from Ex- Chairman of the Federal Reserve Ben Bernanke describe the coronavirus economic halt as more like a natural disaster than an economic recession or depression.
“It’s really much closer to a major snowstorm or a natural disaster
than it is to a classic 1930s-style depression.”
Charter Oak seeks to prepare our clients for all three types of market declines by continuing to embrace strategies such as asset allocation and portfolio rebalancing.
Asset allocation’s primary purpose is to manage risk. Clients who are able to accept higher levels of risk will have greater investments in stocks, while clients who have a lower propensity for risk will generally have a lower level of stock ownership. Currently, a great many of Charter Oak clients have approximately 60% invested in stocks and 40% invested in fixed investments such as bonds or cash. These fixed investments act as a ballast to portfolios when stocks become volatile. This time is no different, as fixed investments have remained flat over these last few weeks, and provided portfolios with balance during these periods of volatility.
Rebalancing is the action of adjusting your portfolio to keep it in line with your asset allocation and risk level; in other words, maintaining the target percentages of stocks, bonds and cash. Often, market movements (whether up or down) can alter your ownership percentages. Thus, rebalancing your investments and bringing your ownership percentages back in line is very important during periods of high market volatility, and needs to occur in both up and down markets.
The chart below visualizes the rebalancing concept. Historically, as the percentage of stocks in a portfolio has increased, so have the portfolio’s returns. But there’s a trade-off: the higher the percentage of stocks, the greater the risk and subsequent loss during market corrections.
While investing for the long-term requires patience, a disciplined approach to asset allocation and rebalancing can help create value beyond the cyclical trends of the markets.
As our communication comes full circle, we cannot say for certain how COVID-19 will be historically classified as a market event. Presently, we take comfort in Chairman Bernanke’s assessment of most recent events as a snowstorm rather than a prolonged occurrence. We clearly see this market volatility as an event-driven economic event, likely resulting in shorter length, smaller decline, and a quicker recovery than previous corrections.
Charter Oak will continue to work diligently by managing your investments, providing timely information and guidance, and measured advice. We will continue to be available by phone, email and online meeting for any questions.
Thank you for the opportunity to be your trusted advisor and to provide clarity and perspective during these times.