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ISC Model Update - February 2020Submitted by The Wealth Consulting Group on April 21st, 2020
ISC Model Updates February:
The U.S. market’s muted response to COVID-19 relative to international markets had an abrupt halt to finish out the month with the S&P 500 experiencing its fastest 10% decline in history. To reiterate a critical point from last month’s commentary,
As was mentioned in last month’s commentary the majority of last year’s gains were attributable to multiple expansion as the market looked through weakness and towards a reacceleration of growth this year. That did leave valuations stretched from a historical perspective coming into the year, and thus, vulnerable to any disruption to the growth outlook.
Any disruption to the growth outlook likely would have seen a sharp rerating of equities. Enter possibly one of the largest simultaneous supply and demand shocks the global economy has witnessed, and you get the most rapid 10%+ decline in history to close out the month of February.
The treasury market had been sensing trouble in advance of equities as represented by the 20+ year treasury index chart below. The price of the index had advanced over 15.5% through the end of February as investors likely began to price some combination of further slowing growth and inflation as well as easing from the Federal Reserve. This price appreciation was due to a significant decline in rates. The 30-year treasury declined to a record low 1.67% to end the month!
Long duration treasuries serve as an extreme example, but treasuries and other high-quality bonds did counterbalance the declines in equities through February.
With rates as low as they are and the likely global fiscal and monetary response to combat an economic slowdown, a key question the committee wrestles with is will this ballast property continue? It may be one of the most critical questions in the years to come. The negative correlation of stocks and bonds is the fundamental underpinning of many investors’ portfolios. This could call for a greater role for nontraditional assets and strategies in portfolios. The committee will continue to explore these options.
Flash in the Pan: Update
While the U.S. caught up to international markets on the downside in February, it continues to outperform on a relative basis as the dollar remains stubbornly strong. Stubbornly so as its strength continues despite the growing consensus around aggressive action from the Fed at the close of the month.
Small caps continue to underperform.
And growth again handily outperformed value.
The dollar declined in the back half of the month but still closed marginally higher for the month. U.S. policy makers’ ability, or inability, to curtail the dollar’s rise remains critical to observe. While equities generally may remain under pressure, the dollar’s strength likely means U.S. markets continue to win on a relative basis, and a secular shift favoring value and international equities will remain elusive.
As has been discussed, the growth subset of the S&P 500 has continued to dominate all other asset classes. If we take a closer look at the S&P 500 Growth Index, it reveals further concentration. Looking under the hood of the S&P 500 Growth Index, the top 5 holdings: Microsoft, Apple, Amazon, Facebook, and Alphabet comprise almost 35% of the index, and over 51% of the index is in the Information Technology and Communication Services sector! Clearly, the narrative around fortress balance sheets and “secular growth” remains firmly entrenched, and given relative outperformance, the market appears to view these stocks as a haven. However, the persistence of this trend essentially rests on the fortunes of just five companies due to these extreme levels of concentration. History is replete with analogs suggesting this trend won’t last forever, or is it truly different this time?
The ISC Growth & Income Benchmark is a blend of 33% S&P 500, 9.6% S&P 400, 2.4% S&P 600, 10.8% MSCI EAFE, 4.2% MSCI Emerging Markets, 37% Barclays Aggregate, and 3% Cash.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Value investments can perform differently from the market as a whole. They can remain undervalued by the marker for long periods of times.
WCG Wealth Advisors, The Wealth Consulting Group and LPL Financial are not affiliated with any of the entities referenced.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through chanced in the aggregate market value of 500 stocks representing all major industries
The S&P Growth and Value Indices are companies in each U.S. index that are split into two groups bases on price-to-book ratio to create growth and value indices. The Value index contains companies with lower price-to-book ratios, while the Growth index contains those with higher ratios.
The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
The S&P Small Cap 600 Index is an unmanaged index generally representative of the market for the stocks of small capitalization U.S. companies.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S Aggregate Bond Index is and index of the U.S. investment-grade bond market, including both government and corporate bonds.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely help by individuals and institutional investors.
The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies.