In any emergency, the speed and effectiveness of the response is crucial to the outcome. Governments around the world responded in various ways to the outbreak of COVID-19, the first global pandemic (GP) in a century. The effectiveness of those responses will largely define the economic outcomes we will see in the quarters and years to come. In contrast, financial markets have already responded to government intervention with the fastest recovery in history.
Domestically, our government quickly reacted to the outbreak of COVID-19 with enormous fiscal and monetary stimulus. Those actions were enough to restore confidence in both debt and equity markets. While the sudden stop in economic activity that occurred in March and April has had wide ranging effects on many workers and industries, the markets have, at present, recovered as confidence was restored. Notably the economic data through September suggests that the recovery is well underway.
Winners and Losers
Every recessionary environment will have economic winners and losers. After the Great Recession of 2008-2009, the housing industry experienced years of low growth as consumer balance sheets recovered and excess inventory of houses needed to be worked off. The GP has its own winners and losers as we can see below.
Source:Tradingview.com Performance as of 9/30/2020)
The healing process for the economy will take time and will occur at different speeds for different industries. The chart above illustrates the year-to-date performance of all the industry sectors of the S&P 500. Investors have responded with clear biases toward industries like Technology and Communication Services, while Financials and Energy stocks are priced for disaster. These moves have resulted in significant concentration within the market. Namely in technology stocks.
To illustrate this, we note that the five largest companies in the S&P 500 make up over 22% of the index. Apple, Amazon, Google, Facebook and Microsoft have largely pulled this index positive this year while the other 495 stocks have lagged behind. History tells us that in time there will be a balancing in the market.
Since we know we cannot predict when this rebalancing will happen, we maintain our diversified approach in our portfolios and our process.
Deep sea fishing boats ought to carry more than one engine. It should be obvious that if you are going to venture far out to sea, you should want a back-up in case an engine fails. It is the same with our portfolio diversification. If one engine temporarily stops working, we can rely on another. Given the extreme concentration in the market and the uncertainty surrounding the global pandemic discussed above, sticking to your investment plan has never been more important.
Traditionally, investors have relied on the bond market for diversification away from equities. Today this is an extremely challenging proposition. As the U.S. 30-year bond is currently yielding 1.45%, investors are being forced to re-evaluate the best way to control risk within portfolios and where else to source a return.
At Cornerstone Advisory, we have seen this environment before and have been researching and executing on alternatives to bonds and stocks for many years. In these challenging times, we encourage all our clients to revisit their portfolios as well as their financial plans with their respective advisors. Having a preset plan, should prepare you to weather the uncertain waters that inherently lie ahead.
As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.
The Cornerstone Team
Disclosure: Cornerstone Advisory, LLC, is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.