Fears that the outbreak may get worse brought stock market benchmarks across the world into a market correction, technically defined as a drop of 10 percent or more. The current decline in U.S. stocks has been steady for the past week, and the penultimate trading day of the month marked the worst day for American shares since 2011, following continued slides in Asia and Europe. Bond markets are affected as well. Global sovereign interest rates are dropping precipitously, with 10-year U.S. Treasury bond yields falling to a record low of 1.15% (as of 02/28/2020). Corporate credit has widened by 14.2% during the last week of February, implying companies are more likely to default than before the correction.
We’ve addressed the negative influence that constant media reports have on the markets in the past, notably in a December 2018 update following the last market correction.
Humans are hardwired to respond to fear and greed… and even though the world has changed enormously since the first stock exchange was formed in London in 1773, investor behavior – like human nature - has remained constant. When prices are rising, investors become more aggressive (greed), and when prices are falling, they become more timid (fear). We know intuitively that this is the opposite of how we are supposed to behave (buy low, sell high!), but because of our hardwiring, we find it difficult to fight the emotions of riding the markets.
Since 1974, corrections are limited to short, shallow declines and rarely continue to full blown bear markets, defined as stock market declines greater than 20%. The last correction - in the fourth quarter of 2018 - was followed by a 31% increase in the S&P 500 for the following year. Stock prices go up and down at any given point in time, but generally increase over the long term.
What Should You Be Doing Now?
We think our clients should always have a “band” (or range) of stock market exposure depending on risk tolerance, income needs, age and various other client-specific factors. For clients who have an allocation to stocks, in times of market volatility, we believe you should always maintain some stock exposure rather than getting out of the market completely. While exiting the market might ease your stress and help you avoid losses in the short-term, our experience has been that clients who sell out of the market completely rarely re-enter at a point lower than when they exited - thus missing the long-term return potential stock investments offer.
Sell it All/Sell Some/Hold/Buy Some?
If you are feeling considerable panic and feel like you must take “some action,” talk with your Client Advisor about slightly reducing your stock exposure (“selling some”), but not completely eliminating it as part of your broader strategy. If you are able to keep the “fear” side of your emotions in check at this point, history shows us that buying on dips, not selling, has provided enhanced long-term returns. In general, we believe holding your stock position, or “buying some,” is the best strategy in times of stock market declines. This is where a longer-term perspective and the calm guidance from your Freestone Client Advisor can really help. And it really bears repeating: your wealth management goals are for the long term. Freestone is here to guide you through the short-term turmoil.
Within our stock market exposure, we prefer global diversification to solely U.S. exposure for the following reason:
▪ Many major non-U.S. stock indices have already experienced significant corrections and are trading at much lower valuations than the U.S. stock market. We expect the returns of non-U.S. stock markets to be significantly higher than the U.S. stock market going forward. The U.S. stock market has outperformed non-U.S. markets (as measured by the MSCI ACWI Ex-U.S. index) by a significant amount since 2009. We think there is a good probability that these markets will revert to their long-term averages.
For extra cash that is not going into stock or other “equity risk” investments, we recommend incorporating one or more fixed income strategies with current cash yields of roughly 2% depending on the strategy, or money market funds, which can yield over 1% currently. While 1-4% is not a return that meets most of our clients’ long-term objectives, it follows years of 0% (or near 0%) interest on money-markets and other short-term bonds. Importantly, we are seeing positive rates of return for this part of the portfolio while still maintaining “dry powder” for continued buying of stocks should the market fall further.
Freestone Capital Management is unique because we offer investments other than stocks and bonds (Alternative Investments). During a roaring bull market, stock market alternatives seem less interesting. Only during the inevitable stock market corrections and bear markets does the value of our alternative investment offerings become more apparent. You should have a conversation with your Client Advisor to see if these make sense for your situation, or to understand how the exposure you have now is helping in this environment.
Thank you for entrusting us with your hard-earned capital. We take very seriously our fiduciary responsibility for your assets. While Freestone customizes portfolio allocations based on the specific needs of each individual client, the universal approach of buy low/sell high will always endure, regardless of the current “news cycle.” Please contact your Client Advisor if you have any questions or just want to talk.
Updated as of February 28, 2020