by Keith Aleardi, Fulton Bank
The situation
It has been an ugly few weeks for equity investors across the globe. The market declines investors have experienced these past few weeks are sure to give even one with the heartiest of constitutions indigestion. The fall has been violent and swift; the Dow Jones Industrial Average and the S&P 500 each experienced the fastest decline into correction territory from all-time highs in their respective histories. Market participants fear that the coronavirus outbreak may turn from an epidemic to a pandemic, with rapid expansion of human-to-human infections across all continents. To add fuel to the fire, Saudi Arabia and Russia instigated a price war over the weekend causing oil prices to plunge to the lowest levels since 2016, down about 22%. Energy companies are large employers, highly leveraged and make up an out of proportion part of the high yield debt market, creating further economic risk.
What we are doing about it
- It is common to consider selling stocks in time of crisis. However, to time a market correction both getting out of stocks and then back in is complicated if not impossible. A better way of risk management is to be diversified, have the proper long-term allocation, rebalance regularly and upgrade your equity position based on current information. We have been active in all these areas.
- First, the investment committee elected to reduce our Emerging markets exposure in the portfolio late last year. China makes up a large portion of the EM index and EM countries are highly sensitive to commodity prices. EM stocks have been one of the hardest areas hit during this correction.
- Second, we took those funds and further overweighed Large Cap US growth stocks, the better place to be. While the S&P 500 is down 7.65% year-to-date, growth stocks have only been down 4.36% .
- Third we have been upgrading our position to better reflect the uncertainty of a prolonged contagion and the economic fallout that could result. We have sold energy stocks, which in light of this weekend’s news was positive, and have been purchasing stocks in the business technology, health care and communication services industries. The basis here is that companies will be looking for different ways to do business, remotely or in smaller group settings. All which have been outperformers in this recent decline and should do well when we see a recovery.
- Lastly, we incorporate a disciplined rebalancing process. We normally rebalance when the portfolio deviates 5% from its long-term allocation. We can override this if need be, but it puts in place a strictness to be selling appreciated assets such as bonds in this case and buying depreciated investments such as stocks.
What is next?
Corrections are typical. In fact, we usually see an inter-year correction every year, but markets recover positively in the majority of them. However, it is important not to panic and do something that is imprudent. We are monitoring the situation very closely and are in regular conversation with our partners and advisors. Our Investment Committee is informed and ready to take further action where needed. We are a fiduciary of your assets and they are very important to us. It is why you partner with professionals like the Foundation. We will continue to be in communication with you, your committee and stakeholders as updates develop.
