Market volatility is a global focus as we approach the Ides of March, and investors may wonder how much of an impact the downward trend will have. In our view, this period was inevitable, but it presents an opportunity for those who were prepared. By focusing on sound fundamentals and long-term investment management strategies, we positioned our portfolios for success in challenging market environments.
No doubt, the markets now find themselves at an inflection point – and we think rightly so. After stalling at the end of 2018 amid concerns over the potential disruptions that tariffs and trade wars might have on the global economy, the S&P 500 was up nearly 30% last year on the calming of the China-US tensions and the subsequent promise of a strong advance in 2020 earnings. The Federal Reserve also noted it did not intend to tighten rates in 2020, giving equity investors the green light to pile into U.S. markets. This made the market particularly vulnerable to a pullback with any change in the global economic picture.
Enter a tandem of global disruptions: coronavirus and an oil price war. The coronavirus has already catalyzed extraordinary policy action from governments and central banks around the world. The oil shock has put further pressure on central banks to do more. Interest rates have plummeted as investors chase into bonds in a flight to safety. Yields on 10-year and 30-year U.S. Treasuries have fallen to all-time lows with the 30-year note now below 1%.
Equity investors have been swinging wildly this year between buying and selling:
- buying stocks on the promise that historically low interest rates would drive more momentum in the equity markets, and
- selling on the sense that emergency policy responses were validating the fact that economies around the globe are indeed fragile, and the Coronavirus will continue to affect global economic activity for longer than originally expected.
The oil crash has now tilted the scales completely over to the sellers. Markets have quickly moved into bear territory, down nearly 20% from recent all-time highs.
The equity market adjustments that we have seen thus far seem warranted. Momentum-chasers are being punished, and fear is reentering the equation after a period of speculative excesses. The equity markets are now finding their way to a position on the global economy that is more in line with what we have been seeing all along. Over the last three years, equities in our performance composites have outperformed the major indices (including the S&P 500), and they have given up significantly less than major indices during this correction. Here are a few of the reasons behind that performance:
- Recognizing that many major economies around the globe continue to face significant challenges, we have been focused on investment opportunities in equities that do not require coordinated global growth to succeed. While energy investments and other highly cyclical investments require the tailwinds of such coordination to succeed, for instance, investments in automation, robotics, digital transaction technologies, expanded genomics testing, and other businesses built on demand-building innovations do not.
- We have been disciplined about rebalancing to control risks in portfolios. We have trimmed back many successful investments that attracted the attention of an excited broader market and added to undervalued investments in overseas markets and under-appreciated industries in which companies were sold by momentum-chasing investors in order to fund the most popular technology and communications stocks. In balanced accounts, we were also diligent about keeping clients at their long-term asset allocation targets by trimming ballooning equity exposures year-by-year to build cash and short-term bond reserves.
- We purchase fundamentally sound assets that are built to withstand the most challenging economic environments. Our portfolios are not designed to match up with the sector or capitalization weightings of any index. The push into indices has amplified market risks for a large group of investors. They are not only exposed to several market segments that are destined to underperform in the current slow-growth economic environment, but they are also vulnerable to concentration risk. To underscore this last point: Only 5 technology names accounted for 18% of the market capitalization of the S&P 500 at the end of last year.
When people ask us what we plan to do now that these challenges have surfaced, we are comfortable saying that we have done much of the critical risk management work over the last few years by harvesting gains and rebalancing portfolios when the sun was shining. We are now in a position to not only weather the current challenges but also to take advantage as market fears reprice superb companies with sustainable growth prospects based on advancing innovations.
DISCLOSURE: Reynders, McVeigh Capital Management, LLC (“RMCM”) is an SEC-registered investment adviser established in 2005. This commentary is for informational and educational purposes only and should not be construed as investment advice, and should not be relied on as such. The opinions expressed in this material are subject to change and represent the current, good-faith views of RMCM at the time of publication. All information has been obtained from sources believed to be reliable but its accuracy is not guaranteed. Certain statements may be deemed forward-looking, but such statements are not guarantees of future performance. Past performance does not guarantee future results.