Buttonwood Investment Policy Committee Update – March 2020
For most of the last two months we saw the momentum from 2019 carry over to 2020. However, that momentum was fueled by the anticipation of an increase in corporate earnings more than actual earnings or robust economic growth. As we mentioned in January, with more volatility and greater potential for market extremes, our focus for 2020 will be to “participate but defend.”
To that point, the impact of coronavirus took its toll on the stock market last week with the Dow and S&P 500 falling about 12%. Once again, diversification paid off as the bond market rallied on a flight to quality. The yield on the 10-year Treasury bond fell from a February high of 1.65% down to 1.1% by the end of the week.
Like the rest of the world, we have been watching the markets and specifically the performance of our investment allocations. As the news headlines focus on the losses, we are happy to report our allocations have performed as anticipated – protecting assets as the stock markets around the world have declined.
Where do we go from here?
As we reported in November , it was our opinion the stock market was getting ahead of itself. Assuming we were right, a correction, while not fun to live through, can be healthy. We also continue to believe the consumer remains the key to continued growth for the US economy. As of last week the unemployment rate is 3.6%, down from 10% in 2009, and a wage growth of about 3% continues to put more money in workers wallets.
If the consumer reacts to coronavirus as if it is a short-term problem; and continues spending, we believe it’s possible for the stock markets and economy to rebound. If however, the consumer views coronavirus as a life changing event, this could lead to the next recession. For a real-world example, after the attacks in New York City on 9/11/01, we, as consumers, shut down and begin to ‘nest’ at home. The stock market didn’t reach bottom until March 2003.
The market is always looking forward, and without a strong consumer, the glass ½ full view of 2019 begins to be viewed as ½ empty. While the “water level” (GDP) of the glass (economy) hasn’t yet changed, the sentiment last week shifted from optimism to pessimism. Instead of earnings and GDP growth increasing in 2020 as forecast, the focus shifted to concerns about the slowing growth impact of coronavirus on world economies, increasing corporate and government debt levels, manufacturing remaining weak, inventories building, Europe limping along, the uncertainty of November elections in the US, and more.
Let’s talk strategy!
Based off our 2020 philosophy of “participate but defend”: Last year we reduced risk in our bond investments by trimming exposure to riskier, lower rated bonds. We also shifted our overweight in stock investments from growth stocks to value stocks; companies with cleaner balance sheets, stronger earnings and higher dividends. In December we eliminated our allocation to Real Estate and moved those assets to money market. Also starting in December we have allowed year end distributions, dividends and interest to accumulate in cash. Each of these adjustments had a positive impact on returns last week.
Depending on how the consumer reacts to coronavirus we have several strategies we are prepared to implement. We can continue to stay with our current cash heavy, ‘participate but defend’ allocation. We can reinvest the cash raised from the sale of Real Estate in December. We can implement a ‘buy rebalance’ and invest cash that has built up from dividends, interest, etc. We can implement a ‘full rebalance’ by selling investments overweight our target allocation (bonds) and buying investments that are underweight targets (stocks), and more!
While market volatility and uncertainty of world events like coronavirus aren’t fun, both are a part of the world we live in; and both, if managed logically, can create opportunity. As always, the core focus for the Buttonwood Investment Policy Committee (IPC) remains on our goal of achieving a more consistent rate of return over full economic cycles. With a more consistent rate of return we believe you will have a smoother financial ride through life.
If you have specific questions about our strategy or your allocation, please let us know and we can dive into the details at our next meeting. And while we don’t recommend fixating on short term market fluctuations, if you would like to check specific performance of your investments, our Buttonwood Portal is available 24/7/365.
Thank you!
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