The eruption of COVID-19 across the globe was a reminder that uncertainty is constant. Economic shutdowns necessitated by the virus slammed the brakes on the global economy and sent investors running for shelter. After peaking on February 19th, global stocks lost a third of their value in a one-month period before bottoming on March 23rd.
Small cap stocks took the brunt of the hit, falling by about 10% more than capitalization weighted indexes like the S&P 500 which were supported by mega-cap technology companies. The very biggest stocks in the world were viewed as potential beneficiaries from the pandemic. International stocks lagged the US, largely from currency. The dollar benefitted from its status as the reserve currency in a panic.
The fixed income market also experienced significant disruptions. Corporate bonds and long-dated treasuries plummeted in mid-March as panic peaked, but largely recovered by quarter end. In a flight to safety, long-dated treasuries rallied by more than 20% in the quarter, driving almost all gains in the US bond market. With interest rates now extremely low, we recommend investors are cautious when allocating to long-duration bonds. Treasuries provide diversification from stocks and often serve as a ballast if the economy stalls out, but there is also significant risk if investors start to demand more yield from a highly indebted government.
For investors, the onset of the pandemic shed a light on the importance of time. Day to day volatility reached historic proportions. Many investors abandoned their plan amidst the selling. While uncertainty dominates the short-term, long-term results can be better controlled. The coronavirus will impart awful costs but will be defeated. Economic and market cycles will come and go. The timing is highly unpredictable. We encourage people to think in that context when deciding how much to own in stocks and which stocks to own.
Personal Capital Managed Portfolios: Rebalancing is most impactful in times of volatility. In January we reduced exposure to some stocks which did well in 2019 and conversely, in March we pared back two core bond ETF holdings. We also took advantage of the current environment to conduct multiple rounds of tax loss harvesting. To keep portfolios in balance, we took a measured approach, targeting specific subsets of securities at a loss.
Smart Weighting lagged capitalization weighted indexes, primarily due to greater exposure to small cap stocks and lower exposure to the very biggest stocks. More even sector weighting was a modest detractor while stock selection helped. An underweight to volatile long-term treasuries detracted from relative performance in bonds. Commodities and real estate were down while gold was up.
This communication is for informational purposes only and does not constitute a recommendation to buy or sell securities nor does it reflect performance or investment outlook of aggregated accounts managed by a third party. Past performance is not a guarantee of future return or indicative of future performance. Investing involves risk. Commentary about Personal Capital Managed Portfolios applies solely to Personal Capital Advisors investment client portfolios. Actions taken in, or performance returns of, your portfolio may differ from the general commentary provided.