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Special Report: Second Update on Recent Financial Market Turbulence

March 26, 2020
By Patrick V. Masso, CFA

In light of recent developments in the financial markets, we are sharing our views regarding the issues and how we have responded with our management of client portfolios.

Where Are We Now?

Financial market volatility has, as expected, remained extremely elevated since our last Special Report on March 5. In total, the S&P 500 Index has experienced a greater than 35% decline since peaking on February 19; also, on March 9, the 10-Year US Treasury Note printed a yield below 0.40%. Corporate bond credit spreads, the additional yield above and beyond a like-kind US Treasury bond earned for taking greater risk, have increased substantially. Heightened volatility has spread across asset classes – including safe-haven assets like gold and government bonds.

Policymakers have begun adjusting policies to lessen the financial and economic blow stemming from the coronavirus. Monetary policymakers at global central banks like the Federal Reserve have responded more quickly than fiscal decisionmakers, such as the US Congress. The magnitude of the Fed’s response is historic. Federal Reserve members have voted to run every play in the 2008 Global Financial Crisis playbook and even added a few more tricks to the arsenal. The Fed is laser-focused on two things – ensuring businesses and consumers have the ability to access credit with attractive lending terms and safeguarding the smooth functioning of financial markets.

Those in the Senate and House of Representatives were slower to react, just as they were in 2008. Risk assets have continued putting pressure on these decisionmakers to enact a plan. The current crisis is much different than the Global Financial Crisis. The events leading up to 2008 were akin to stepping on the brake gently, then pushing down progressively harder. Today’s events are more like pulling the emergency brake, which propels things into the windshield very quickly.

Congress has come to an agreement to address this abrupt impact. The recently announced $2 trillion fiscal stimulus bill includes ways to bridge the gap in economic activity while many businesses that are shut down or experiencing substantial revenue declines are having difficulty retaining and paying employees. As some of the damage will likely be irreversible (watch for clues in initial claims for unemployment insurance released every week on Thursday morning), acting quickly on a large scale was of utmost importance.

How Did we Mitigate the Downside for Clients?

Heartland Bank Wealth Management clients have portfolios with a diversified strategic asset allocation – the targeted percentage mix of cash, bonds, stocks, and alternative investments is aligned with their personal financial goals, time horizon, and risk tolerance. We actively manage our clients’ investments around these target allocations.

Coming into the year, portfolios were intentionally positioned with a defensive tilt – less money invested in stocks and alternative investments plus more money invested in bonds than the prescribed strategic asset allocation target. Our decision to position portfolios in this manner helped soften what would have otherwise been a larger blow to accounts. Remember, a 50% loss requires a 100% gain to get back to even. Losses work geometrically against you, so mitigating them is crucial.

Below is a depiction of how the performance of our most-utilized investment strategies stacks up against the policy benchmark year-to-date. Policy benchmarks allow a fair, apples-to-apples comparison throughout time by comparing each asset class in the portfolio to a like benchmark (i.e. the allocation to bonds in a portfolio is compared to a bond benchmark while the allocation to stocks in the same portfolio is compared to a stock benchmark). The result is known as a “blended benchmark”.

Capitalizing on Opportunities

Actively managing portfolios to soften the downside affords our clients a greater ability to capitalize on the upside. Financial markets are in the process of discounting a very large slowdown in economic activity, likely a deep recession. Whether the recession lasts for a couple quarters or longer is still not clear and likely won’t be until it is in the rearview mirror. Much will hinge on how long we are instructed to socially distance ourselves from one another, how quickly a biological solution to the virus can be attained and mass distributed, and how deep and wide the economic pain goes before the lagged positive impact from monetary and fiscal support reverberates through the economy.

Historically, financial markets have priced in these events ahead of time. In other words, expect markets to bottom before the negative news flow abates. Heartland Bank Wealth Management will employ its collective experience and understanding of how markets operate in practice – not theory – as we strategically and thoughtfully reposition client portfolios less defensively. Ultimately, an allocation that is more aggressive than long-term strategic asset allocation targets will be warranted. It will likely be prudent to navigate this transition over time in a series of measured steps rather than in one fell swoop.


We are clearly living through a historic economic and financial market dislocation. Markets should be expected to adjust prices to adapt to a lower level of economic activity. Monetary and fiscal authorities are tasked with creating and implementing effective policy responses that soften the economic blow, ensure markets function in an orderly fashion, and cultivate fertile borrowing conditions for businesses and consumers wanting to expand operations or purchase homes. These policies should serve as the springboard for the acceleration of future growth.

Heartland Bank Wealth Management has taken action to mitigate losses and stands ready to actively reposition portfolios so clients may capitalize on future opportunities and achieve their goals.

Securities and insurance products are NOT deposits of Heartland Bank, are NOT FDIC insured, are NOT guaranteed by or obligations of the bank, and are subject to potential fluctuation in return and possible loss of principal.

Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.