Special Report: Update on Recent Financial Market Turbulence

March 05, 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.

What's happening?

From the February 19th peak to the February 28th low, the S&P 500 Index declined 15.84%. Over the same time period, the yield on the 10-Year US Treasury Note declined from 1.57% to 0.91%. The root cause of these significant moves is the coronavirus making landfall in the United States and its continued spread across the globe.

More specifically, the reason is the unknown magnitude of impact the virus will have on real economic activity. What is certain is that global supply chains are experiencing a negative shock, whether it be difficulty in harnessing inputs required to create finished products or access to human capital that is under quarantine and forcibly unable to work. Consumers also appear to be changing spending patterns, which is resulting in a simultaneous demand shock (lower spending on travel and leisure/higher demand for health care and cleaning supplies).

In response to these developments, global central banks are choosing to loosen monetary policy. Earlier this week, the US Federal Reserve announced an emergency 0.50% reduction in the Federal Funds rate to a new range between 1.0%-1.25%. Markets are anticipating another 0.50% reduction by the end of 2020. The central banks of China, Japan, Australia, and Canada have changed their monetary policies in similar ways. By loosening monetary policy, central banks are aiming to make borrowing easier for individuals and businesses: Homeowners may find it advantageous to refinance mortgage debt and companies may reissue bonds to reduce interest expense.

Historical Context

Over time, financial markets have dealt with significant hurdles and experienced volatility of the magnitude we are now experiencing. The following two charts demonstrate the historical facts. The first shows the S&P 500’s price return (black bar) for each calendar year and the largest peak-to-trough decline within the year (red dot) going back to 1980. The average intra-year peak-to-trough decline over this period has been 13.8%. The second chart provides a much longer perspective, showing performance of the S&P Composite Index relative to world events over the last 120 years. The overarching lesson is that markets and economies often deal with periods of stress but are resilient over the long term.

How is Heartland Bank's Wealth Management Team responding?

Investment Objectives & Portfolio Construction

To help portfolios endure shocks, such as the coronavirus impact, it is of utmost importance to intentionally design a portfolio with a diversified strategic asset allocation – the targeted percentage mix of cash, bonds, stocks, and alternative investments – aligned with your personal financial goals, time horizon, and risk tolerance. Heartland Bank’s Wealth Management team is equipped with the knowledge, experience, and technology to deliver well-constructed portfolios that meet your unique circumstances and constraints.

Gaining an up-front understanding of how volatile your portfolio can be, based on its underlying strategic asset allocation, is critically important during times of financial market turbulence. In fact, for our clients, we have built tools that demonstrate the range of expected returns for their portfolios over a variety of time periods. This helps contextualize current volatility with what are normal and abnormal fluctuations.

Real-Time Active Management

Selecting an appropriate strategic asset allocation should not be a static “set it and forget it” solution. We not only craft portfolios with a strategically targeted mix of asset classes, but also include lower and upper bounds within which portfolios may fluctuate around the targets over time. Think of it as intentional flexibility that is systematically built into the investment process.

Intelligently monitoring and managing exposures in the context of the upper and lower bounds of the overall strategic asset allocation adds value over time, especially during periods of financial market dislocation like we are currently witnessing. As part of our repeatable investment process, we closely monitor how exposures are changing in our clients’ portfolios – during easy AND challenging markets! In fact, we entered 2020 with relatively defensive positioning within our clients’ portfolios. In the face of the swift equity market declines, we took action. We actively managed portfolios by opportunistically increasing exposure to stocks and alternative investments, while reducing exposure to bonds.

Conclusion

If history repeats itself, this crisis will pass, markets will respond, and portfolios will return to pre-crisis levels. Rest assured that we will continue to monitor the situation and actively manage portfolios to optimize returns within the prescribed level of risk.

Those who fail to plan, plan to fail. If you would like to discuss your unique situation, please contact your Heartland Bank Wealth Advisor. Remember to gain an up-front understanding of what is a normal and abnormal fluctuation for your portfolio. This way, when preparation meets opportunity, the plan can be carried out confidently, without hesitation, to create a successful outcome!


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.