Adviser Outlook, April 2020 - Adviser Investments

Expert Analysis from Experienced Mutual Fund Strategists

Adviser Investments Market Outlook

Adviser Outlook, April 2020

Quick Takes

  • Steps to curb the coronavirus pandemic forced our slow-growth economy into recession during the first quarter, ending the 11-year stock bull market
  • Medical data has supplanted earnings, interest rates and economic reports as the key determinant of near-term market behavior
  • Our longstanding commitment to and spending on technological advancements has enabled the entire Adviser Investments team to stay secure and fully operational

With stunning speed, a U.S.-China trade war, Brexit, impeachment and even this year’s U.S. elections have moved to the back burner as an all-out war against a microscopic enemy, COVID-19, has become a global health, economic and market focus.

The human toll has been great and we are thankful for the relative safety from which we are able to continue working with you. Our condolences go out to any and all who have suffered from this silent pathogen. Of one thing we are certain, though: The collective brainpower of our health care experts will defeat the coronavirus so long as we are patient and careful. We hope you and your loved ones remain healthy and well.

From an economic and market viewpoint, the pandemic has taken a swift and steep toll.

After notching 39 new highs in 2019, the U.S. stock market hit another 13 records through February.

Then, the unexpected happened, sending shock waves across global economies and markets. In the U.S., we went from a slow-growth economy and bull market to a dramatic recession and tumbling market almost overnight—it took just 16 trading days for the S&P 500 index to enter a bear market, down 20% from its most recent peak. (For perspective on bear markets, please read on.)Both Congress and the Federal Reserve (and their global equivalents) are already providing trillions of dollars, yen and euros of stimulus in an effort to mitigate some of the worst impacts to everyday life.

Most importantly, hopes are pinned on signs of “flattening the curve”—slowing down the contagion’s spread and moving past peak mortality rates.

All of this has led to a recent reversal and rally for stocks. Headlines in The Wall Street Journal and elsewhere have trumpeted the notion that the bear market turned into a new bull market in just three days as the Dow Jones Industrial Average gained more than 20% from its March 23 low.

We wish it were that easy. We don’t doubt that, at some point, the large swaths of the economy that have been shut down will be turned back on. But we think that the switch to a lasting recovery and to a return to normal life is the discovery of a COVID-19 vaccine, which is still many months in the future.

In the interim, we believe market volatility will remain elevated, driven by traders reacting to each piece of medical, earnings or economic news with either fear or optimism. We will continue, as always, to manage your portfolios with a focus on both the near-term risks and your specific long-term objectives. In our view, the outside managers we invest in together are among the most experienced, battle-tested and informed in the industry.

First Quarter Review

  • The S&P 500 fell 33.8% from its February 19 high, then snapped back and finished the quarter with a -19.6% year-to-date return; foreign stock indexes fared worse
  • Bonds provided a bright spot as investors sought safety—yields fell and the U.S. bond market returned 3.1% in Q1 and 8.9% over the last 12 months
  • Not a single broad sector of the U.S. stock market went unscathed, but the gap between best and worst was wide: Energy stocks fell 52.1% while health care and technology shares outpaced the market with -13.1% returns year-to-date

As 2020 opened, U.S. stocks continued to summit new peaks. The S&P 500 index hit an all-time high on February 19 before fears of the coronavirus swiftly sent U.S. markets (and others around the globe) into 20%-plus declines. At its low, the S&P 500 fell 33.8% from its prior high, before rallying to finish the quarter with a 19.6% decline. Similarly, the Dow Jones Industrial Average and MSCI U.S. Broad Market indexes fell 22.7% and 21.1%, respectively, over the first quarter. And the picture was much the same for the broad foreign indexes, as the MSCI EAFE index of developed markets was down 22.8% while the MSCI Emerging Markets index fell 23.6%.

Bonds Provide Bear-Market Ballast

wdt_ID stocksbonds Q1 12-month

Note: Ranked by Q1 returns. Performance numbers are total returns, reflecting reinvested dividends through 03/31/20.
Source: Morningstar.

Every broad sector of the U.S. stock market declined in the first quarter, but health care (-13.1%), technology (-13.1%) and consumer staples (-13.5%) stocks held up the best. Financial and basic materials company stocks lagged the market in Q1, down 33.1% and 28.0%, respectively. Demand for resources like steel and aluminum slowed as countries went into lockdown, while financials suffered from expectations that Federal Reserve interest-rate cuts would, along with a slowing economy, hurt earnings.

But no industry group was as devastated during the first quarter as the energy sector. Oil and services stocks plummeted 52.1%. The catalyst: Russia and OPEC producers, led by Saudi Arabia, engaged in a price war just as demand was dropping. The combination was a one-two punch, and global behemoths like ExxonMobil and Chevron were knocked to the mat.

Source: Morningstar.

AIQ - 2020Q2 - Sectors

wdt_ID SECTOR 12-mo. Q1
SECTOR 12-mo. Q1

Amidst the market gloom, bonds were a bright spot though trading got a bit wild during March, when traders indiscriminately sold anything that wasn’t issued by the U.S. Treasury. With the help of the Fed, which slashed the fed funds rate to zero and instituted a series of relief programs reminiscent of the response to the 2008 Financial Crisis, the bond market stabilized by quarter-end. The 10-year Treasury was yielding 0.70% on March 31, 122 basis points lower than its 1.92% yield at the start of the year. Remember, lower yields mean higher prices, and the broad U.S. bond market has returned 3.1% year-to-date and 8.9% over the last 12 months.

Our Perspective on Bear Markets

Going by the strict definition of a bear market as a 20% decline from a prior high for the S&P 500 index, this the first one U.S. investors have faced in over a decade. (Though we’ve pointed out in the past that several stock-market sectors have experienced their own short-lived bear markets over the past 10 years). In the chart below, you can see 95-plus years of market history as told through price returns for the U.S. stock market.


Note: Chart shows percentage gains and losses from prior market peaks and troughs as well as hypothetical growth of $100 using returns (excluding dividends) of the Dow Jones Industrial Average from 5/24–9/57 and the S&P 500 from 10/57–3/20. “Growth of $100” line is shown on a logarithmic scale to make early gains and losses more visible.
Source: Morningstar.

If there’s one takeaway from this almost 100-year chart it’s that bear markets tend to be much shorter-lived than bull markets, and that bull market gains dwarf those losses over time. The 34% drawdown we experienced through mid-March is about average in terms of bear-market declines, although it happened faster than any other—bear markets are usually a bit less ferocious, taking more than a year to reach their nadirs.

In the past, stock investors have needed two to three years to recoup their losses after the fact—the average bull market has lasted five years and generated an annualized 20% gain during its run.

Bear & Bull Markets Since 1929

Bear Markets

wdt_ID Time Period Max Decline Length (Months) Recovery (Months)

Bull Markets

wdt_ID Time Period Length (Months) Total Return Ann. Return

Note: Table uses index level returns (excluding dividends) for the Dow Jones Industrial Average from 9/3/29–10/22/57 and the S&P 500 from 10/23/57–3/31/20.
Sources: Morningstar, Adviser Investments.


Since 1924, despite 15 bear markets, the Dow has compounded at a 5.9% annual rate. The S&P 500 index has gained 6.7% a year since its 1957 inception, having gone through 10 bear markets. And those numbers exclude dividends, a significant contributor to an investor’s total return over time. (Total return data is not available for most of the periods covered but as an example of the impact of shareholder income on performance, since the market bottom in March 2009, dividends have added 2.4% in annualized returns to the S&P index’s gains, and this during a period of relatively meager dividend yields.)

We know that market pullbacks are unsettling and potentially unnerving. Yet we also know that each bear market creates wealth-building opportunities for those who don’t just to stay the course but navigate it with reasoned discipline—a hallmark of our investment philosophy and approach.

Our Outlook

  • Economic and earnings data are murky at best—all signs point to a steep but possibly short recession, though markets are pricing in good and bad news well ahead of the facts
  • Bear markets are a part of investing—history shows that they create wealth-building opportunities for investors who stay the course
  • We are actively monitoring your portfolios and weighing trades to keep your investments aligned with near-term risks and your long-term goals

In our last Adviser Outlook, we mentioned that there were some cracks showing in the U.S. economy, though the consumer was holding steady as unemployment was low and household finances were in solid shape by most measures.

That changed with the pandemic. At the end of March, job losses mounted at a blistering pace—at last count, at least 10% of the U.S. labor force has filed for unemployment benefits. We think this number could reach Depression-era levels of 30% or more, and will be a blow to consumer confidence and spending.

Yet the duration of this hit to our economy remains to be seen. A loosening of restrictions on social distancing could yield record growth in recovered jobs and spending—we simply don’t know enough yet to make accurate predictions of how quickly this will take place.

While others may say they have a clear view on earnings and other economic data, we think the outlook remains extremely murky as the world continues to adjust to prolonged social distancing, work-from-home initiatives and major changes to the ways we conduct our daily lives. Clearly, prospects have dimmed for businesses that depend on filling physical spaces like entertainment and travel companies, even as others like technology hardware and service providers as well as online retailers will see a rise in demand.

We’ll be paying close attention to guidance from corporate leaders—what steps they are taking to adapt, what (if any) advantages this crisis creates for them in terms of gaining market share—in an effort to gauge how deep and lasting the economic damage will be.

Right now, we think that the overriding factor to keep an eye on is the medical data. When will cases peak? Could there be a second wave of infection? When will it be safe for businesses to reopen? Without answers to these questions, uncertainty will continue to hang over the markets. As noted above, the sooner rapid tests, reliable treatments and, ultimately, a vaccine can be developed, the better. In our view, these factors are the lynchpin for a return to normalcy.

Though we are waiting for clarity, our hands are not tied when it comes to managing your portfolios. Our disciplined, diversified, risk-aware approach continues to serve us well in trying times like these. As we progress through this crisis, we will err on the side of caution as we seek to safeguard your wealth while keeping you positioned to participate in the potential long-term rewards such crises create. The stock market pullback has given us the chance to upgrade the quality of your portfolios at discounted prices—we have already made some moves and are judiciously weighing other trades, as are the active managers who make the day-to-day decisions in the funds in which you are invested.

Because of the investments we have made in technology, your wealth management team hasn’t missed a beat and has been hard at work on your behalf, updating investment and financial plans and providing myriad support services. If you have any questions about your strategy, and especially if you feel your current financial plan may be inadequate in any way (see the Personal Finance Focus below), call us—we are here to take care of your needs in good times and bad. We are in this together—and we will get through this together.


Planning During a Pandemic

Right now, setting goals and getting your financial life in order may seem like water over this crisis’ dam. But taking the time to review, revise or create a financial plan could bring some relief. Our large and experienced team of financial planners is here to help you—they note the following steps as a way to get started:

  1. Review your goals and objectives. If the life events you’re planning for are five to 10 years away, temporary declines in the market are less likely to put reaching your goals at risk. However, if you were expecting to use a certain amount of money in the next year or so, it’s better to hold it in cash so that stock market drawdowns don’t cut into your spending power. One thought is that funds from canceled travel or other plans could be redeployed toward paying down debts or making your home more comfortable while staying in.
  2. Budget and build an emergency fund. In times of prolonged uncertainty, updating your budget can yield peace of mind, especially if your spending needs have changed. Use our Budget Worksheet or, if you’ve signed up for Adviser Insights, log in and click the “spending” tab. (You can register for Adviser Insights here.) As you revise your budget, make sure to build up a cash reserve of six months of expenses if you’re single. If you’re married with children, bump that up to a year.
  3. Catch up on the CARES Act. The massive $2-trillion relief bill recently passed by Congress has many provisions to help taxpayers and investors. The bill included waiving required minimum distributions (RMDs) from retirement accounts, penalty-free withdrawals from retirement accounts, health care benefits for retirees, student loan relief, small business tax credits, an expansion of unemployment benefits and direct payments to taxpayers, among others. You can find an overview of the bill as well as a deeper dive on the RMD waiver on our Investing for Life blog. You can tune in to our podcast on the subject, “Understanding the CARES Act’s Impact on Your Finances,” too.


Mentoring Is the Adviser Way

In February, Adviser Investments kicked off the fifth year of our mentorship program, which pairs rising leaders with experienced colleagues to develop their careers and deepen connections across the company. Mentees undertake a year-long project to enhance their team’s processes or growth, working closely with their mentors throughout. The program—part of our company’s succession planning—has been a huge success, with 12 graduates to date. Though we’re holding more video calls than face-to-face meetings these days, it’s full steam ahead—we can’t wait to see what this year’s participants accomplish.


This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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