Financial markets are currently experiencing their most turbulent period since the 2008 financial crisis. Such periods of volatility are inevitable and unpredictable. It is to mitigate the impact of such corrections that Archer's portfolios are well diversified.
World stock markets are down 15% to 20% since peaking on February 19, affected by the dual impact of the coronavirus and the oil price war triggered by Saudi Arabia and Russia. Such declines occur on average every 3 ½ years.
On the other side of the portfolio, bonds are up sharply. The yield on Canadian and U.S. 10-year bonds (which moves inversely to their price) is down about 1% since the beginning of the year and briefly fell below 0.50%; a historic level.
What is the impact on Archer clients' portfolios? What is the outlook? What should we do?
What is the impact on a balanced portfolio?
While the decline in the stock markets since the peak on February 19 is sudden and rapid, it comes after a period of strong gains. As of the market close on March 9, the Archer Balanced Portfolios are down approximately 5.6% since February 19 and 2.0% in 2020. However, they are still up 3.2% year-over-year. Nothing catastrophic. Clients with a higher proportion of equities in their portfolios have experienced a larger decline, in line with their risk tolerance.
If the balanced portfolio is weathering this correction relatively well, it is because a lot of work was done beforehand. In addition, depending on each client's investment policy, a good proportion of the portfolio is invested in asset classes that offer diversification and protection.
Archer's pure index approach has also paid off, especially on the bond side. While many active managers had reduced the maturity of bonds in their portfolios, Archer remained invested in the ETF tracking the bond index, which has an average maturity of nearly 11 years. As a result, our clients have benefited fully from the decline in bond rates over the past few weeks.
In addition, Archer's asset allocation means that the balanced portfolio has less exposure to the price of oil, which has limited the downside.
What are the prospects?
The impact of the coronavirus and the oil price war on the economy will determine the medium-term direction of the financial markets.
If the epidemic is relatively short-lived and concerted action by governments and central banks prevents a global recession, the worst is probably behind us.
If, on the other hand, the global economy goes into recession - there have been 12 U.S. recessions and six global recessions since World War II - the stock markets will likely fall further before they begin to recover. The following table provides an overview of the frequency and duration of declines in the U.S. stock market since 1948, as well as the return following the period of decline.
Declines in the S&P500 Index since 1948
What is the right strategy to follow?
It is futile to try to predict the short to medium term direction of the stock markets. While it is painful to suffer a 33% decline in the stock market typically associated with a recession, it would probably be more costly to miss part of the 263% average increase that follows these declines. For example, investors who sold their stocks in 2008-2009 (during the last bear market) bit their fingers off, as the U.S. stock market rebounded 65% from March to December 2009 and has generated excellent returns since.
So what do we do?
Each Archer client has a personalized investment policy, based on his or her personal and financial situation, tolerance for market fluctuations and ability to absorb those fluctuations. This investment policy includes a target asset allocation that seeks long-term capital protection and growth or current income throughout the market cycle, including corrections and down markets.
In the current environment, Archer is disciplined in its investment strategy and continually monitors its clients' portfolios to ensure they remain aligned with the target allocation. This strategy has proven to be successful through all market cycles.
Don't hesitate to contact your Archer consultant to discuss this.
1] Source: Standard and Poors and Capital Group