We’re With You

It has been a challenging few weeks not only for investors alone but for the many affected personally and economically from the emerging COVID-19 pandemic. While there are several financial topics to discuss, we felt it was most appropriate to first and foremost re-iterate our commitment to serving each one of you, be it client or DelosCA friend, during this uncomfortable period. While pandemics are not a normal occurrence, we strongly believe in the resilience of the medical community, and the health professionals working tirelessly to guide the public on the most appropriate path to safety.

While I don’t want to sound like a broken record, this week was yet another one for the books as the drop in the S&P 500 was the biggest one-day decline since the stock market crash of 1987. What makes this more historic is not necessarily the one day drop in of itself, but the speed at which the stock market declined by almost 27% in just three weeks. Needless to say, there have been many developments that have occurred thus prompting many market participants to impulsively and emotionally liquidate their investments.

During these periods of extreme volatility, it is always important to follow your financial plan and ensure that your investment manager utilizes a portfolio construction method that maintains allocations into what we refer to as risk stability assets. Having a balance of risk-oriented assets versus risk stability assets allows portfolios to protect capital in the event of extreme financial stress, which we’ve recently experienced.

As mentioned last week, when periods of extreme volatility ebb and flow through the financial markets, the majority of investments begin to move in the same direction (i.e. correlation) thus eliminating the benefit of diversification. At DelosCA, we have conducted extensive research regarding portfolio construction and therefore design portfolios synced with prevailing economic conditions. In the chart below you will see how a traditional asset allocation maintains reasonable diversification over the rolling 2 year period but when we look at the latest period of financial stress, you will see the majority of risk-assets all moving in the same direction thus eliminating diversification benefits.

The only safe-haven during the latest period of financial stress was found in what we refer to as risk stability-based assets. By having our clients allocated to this segment of the portfolio, we have been able to dampen the volatility and downside exposure during this recent correction.

While the road ahead will be a bumpy path, we believe we are at the tail end of the extreme volatility and in the early phases of a bottoming process. With the latest fiscal policy response and federal reserve liquidity infusion, the financial markets should begin to find solid footing. We urge many market participants to be mindful of being too early as these next few weeks are typically met with a re-test of market lows as economic data begins to emerge. With COVID-19 being forefront in the closure of many venues, we will monitor economic activity closely to assess the impact and to deduce when economic growth will stabilize.

As mentioned, pandemics are not normal occurrences and represent black swan events which are periods of extreme financial stress accompanied with market corrections. It is important to remember that we’ve experienced many extreme episodes in the past and have successfully worked through each overtime.  The most important takeaway is that events such as these require time to repair.
While there is a bit more to go on this rocky road, we are walking with you every step of the way. Please do not hesitate to reach out to me or anyone on the team for any questions you may have.

Sincerely,

ANDREW H. SMITH
Chief Investment Strategist
andrew@delosca.com
asmith971@bloomberg.net