Investors Tread Uncharted Waters

Investors have been subjected to unprecedented volatility since the stock market peak in mid-February. Not just equities, but even short-term investment grade corporate and municipal fixed income securities have exhibited wild swings in price. These are securities that in normal times serve as a safe haven when market conditions are somewhat turbulent. However, there are rare instances when markets are under such severe stress that even these securities are vulnerable to panic selling.

A similar period existed in September and October 2008 during the later stage of one of the worst bear markets in history. The peak for the S&P 500 occurred a year earlier, so astute investors had plenty of warning to adjust portfolios accordingly. Some did not heed the warning. Between September 9 and October 15 2008, the Bloomberg Barclays US Aggregate Bond Index, considered to be representative of the total US bond market, suffered a 4.7% decline. The same index suffered an even worse 6.3% decline between March 9 and March 19 of this year, but the decline occurred only three weeks after stocks topped. This bear market is unfolding in a much more compressed time frame. In fact, by some measures, we’ve just witnessed the most severe decline over a short period of time in history. At its low point on March 29, the S&P 500 Index was off a whopping -33.9% rom its closing high just a month earlier. High-yield corporate bonds, the focus of the Managed Income Strategy, were not spared. The Merrill Lynch HY Index was down -21.5% from peak to trough.

The primary culprit for all this market turmoil is the sudden spread of the novel coronavirus across the
globe, and secondarily the long-running collapse in the price of oil. In response, monetary authorities and Congress felt compelled to act to stem the hemorrhaging of the market and the economy. The Fed initiated two emergency rate cuts, bringing the Federal Funds benchmark interest rate to almost zero. Furthermore, the Fed opened its checkbook to support the bond market by buying Treasury and mortgage-backed securities. Additional measures have been put in place as well. Congress followed by passing a massive $2 Trillion economic relief plan designed to assist American businesses and tens of millions of households. In response, the markets staged a violent rally, with investment-grade bonds recapturing most of their losses. Stocks, on the other hand, recovered only partially and are still showing large losses.

Fortunately, Managed Income’s sell discipline prompted us to exit the market and move to a defensive position in early March, well before the worst of the decline got underway. No one likes to give up profits, but the bulk of our principal has been preserved to take advantage of the inevitable buying opportunity that will emerge once the bear market ends. Declines of this magnitude are typically followed by periods of above-average return, so it’s important to bear in mind that the strategy does best during recoveries from bear market declines.

The question in everyone’s mind is, “Where do we go from here?” I’m not confident that the ultimate low has been seen. Declines of this nature usually require a multi-week basing process to finalize a bottom. That to me is a best-case scenario. No one knows how long and to what degree the novel coronavirus will suppress economic activity. For now, it’s prudent to err on the side of caution.

Best regards,
Bruce P. DeLaurentis