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Investor Letter – May 2020

It has been said that one of the most difficult feats in all of sports is hitting a Major League curveball. Yet many pro baseball players have successfully made a name for themselves by doing just that, although you probably cannot list the game’s top three hitters. If you just tried, a name that probably did not come to mind is Rogers Hornsby, a second baseman with a career .358 batting average, who trails only the legendary Ty Cobb on that list. His career lasted from 1915 to 1937, the majority of which was spent with the St. Louis Cardinals. Hornsby batted an astounding .424 during his best year (and proved it was not a fluke by hitting .403 the next season). He hit a dismal .208 during his worst year, but, even then, he thwarted opposing pitchers more than most with his smooth swing and consistent approach at the plate.

Just like Hornsby, the cornerstone of our long-term equity strategy – placing a greater emphasis on small-cap companies and value companies – has had periods of hitting above and below its long-term average. Our strategy has had periods where it wasn’t the top performer, like those years when Lefty O’Doul beat out Hornsby for the best National League batting average. However, those off-years did not diminish Hornsby’s overall career.

The recent strong performance of large-cap growth stocks has caused some to doubt the efficacy of our strategy. The most recent 10-year period ending March 2020 has seen large-cap stocks (13.6%) soar above their historical average (9.9%). The same can be said for growth stocks (15.3% versus 9.8%). We question how long this will last.

Instead, our focus remains on small-cap stocks. Their latest 10-year performance falls in line with their historical average of 11.8%. Value stocks have underperformed their historical average during the latest 10-year period (11.3% versus 12.8%), but not by much, and both still far exceed the historical average for growth stocks (9.8%).

Following performance trends may result in the occasional outperformance, but rarely does it produce superior long-term outcomes. We believe having a prudent, disciplined investment approach based on evidence and data will produce superior long-term results, just like Hornsby’s prudent, disciplined approach to hitting helped maximize his chances of success at the plate.

If you have any questions about your investments, need to inform us of family or work-related changes, or want to discuss your financial planning needs, please reach out. We are here to help you reach your financial life goals!

Source: Ken French Data Library. Factors and indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends. Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets). All investing involves risk, principal loss is possible.

2020 Q1 Market Update

The journey to achieving your long-term wealth goals follows a road that is not always smooth, clear, or free of debris. Sometimes the market and the world at large will litter our path with obstacles for us to overcome. Global markets have been experiencing increased volatility which comes in stark contrast to the even, steady growth that we often expect.

COVID-19 and the world’s reaction has impacted the global economy in ways no one anticipated. As a result, the first quarter of 2020 has seen record-setting contraction. Unemployment claims jumped to over 10 million in two weeks marking the largest weekly increase in unemployment claims on record two weeks in a row. Naturally, investors priced all this news into the value of stocks, and in Q1 we saw the S&P 500 Index drop 19.6% and small US companies, represented by the S&P 600 index, drop in value by 32.64%.

We don’t know the duration or the extent to which the uncertainty surrounding the COVID-19 coronavirus will affect financial markets. But we do know, at some point, there will be clarity and the fears surrounding the virus will dissipate and markets will react accordingly. Financial markets are incredibly efficient at pricing in news—good or bad—and the reaction can be swift. However, reacting on news is like driving forward while looking in the rearview mirror; news is reflected in prices almost immediately, so navigating based on what is behind us has no value.

It might be days, weeks or possibly months before the fears subside, and the news over that time may get worse before it gets better. Some of you may be tempted to abandon your investment plan and park your investments in cash until the outlook is clear. However, markets can move up just as quickly as they move down, with no clear indication of when you should get back in. Missing these up moves can be the difference between achieving your most important investment goals and failing to reach them in the time you planned or even altogether.

This graph is such a powerful illustration of the danger in trying to time the market. Missing just a few days in the market can drastically impact your portfolio’s overall performance. Remember, it’s “time in” the market, not “timing” the market, that yields great returns.

During volatility, take comfort in knowing that history has shown markets are resilient and continue to grow over time, despite short-term declines. Further, we understand the world is providing enough reason for concern right now; your portfolio doesn’t need to be another one. Instead, turn your focus to what drove your long-term financial goals in the first place—family, friends and those in need.

If you have any questions about your investments or want to discuss your financial planning needs, please reach out. We are happy to help!


Q1 2020 Market Commentary

Global stock markets declined to start the year and effectively erased investor gains from 2019. Both domestic and international fixed income served as a ballast to investor portfolios during the quarter. Falling oil prices, heightened market volatility, and the global spread of the COVID-19 virus all provided large hurdles to market growth.

For the quarter, U.S. stocks (as measured by the S&P 500 Index) lost 19.6%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S. Index) lost 23.3%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) lost 23.6%.

The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, rose in the first quarter—the U.S. dollar increased by 2.8% compared to foreign currencies. Over the past 12 months, the U.S. dollar has appreciated by 1.8%. The increase in the dollar is a headwind to non-U.S. investments held by U.S. investors.

U.S. interest rates fell during the quarter as the Federal Reserve implemented a 1.50% rate reduction to the federal funds rate. The Fed now targets a range of 0.0% to 0.25% for the federal funds rate. Because changes in interest rates and bond prices are inversely related, the decline in interest rates helped increase the quarterly return for many bond asset classes.

U.S. Economic Review

Positive economic growth in the U.S. continued in the fourth quarter of 2019. The final reading for fourth quarter 2019 GDP showed an increase in economic growth of 2.1%. Despite the economic progress of the past 10 years, a slowdown in economic activity due to COVID-19 has started to show in more recent economic data points. The unemployment rate climbed from 50-year lows to 4.4% in March 2020. Domestic inflation remains tame, as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, stayed below the central bank’s 2.0% target with a reading of 1.8% in February 2020. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, U.S. Department of the Treasury, Morningstar Direct 2020.

Financial Markets Review

Both domestic and international stocks across all size and style categories, as well as U.S. real estate investment trust (REIT) securities, declined during the quarter. Non-U.S. stock returns were also impacted by the strengthening U.S. dollar. During the quarter, U.S. large-cap stocks were the best performing asset class while U.S. small-cap stocks were the worst performing. U.S. and global bonds continued performance from the previous quarter by posting positive results.

In the U.S., small-cap stocks underperformed large-cap stocks in all style categories. Value stocks underperformed growth stocks in all style categories. Among the nine style boxes, large-cap growth stocks performed the best and small-cap value stocks experienced the largest loss during the quarter. Source: Morningstar Direct 2020. U.S. markets represented by respective Russell indexes for each category (Large: Russell 1000, Value, and Growth; Mid: Russell Mid Cap, Value, and Growth; Small: Russell 2000, Value, and Growth).

In developed international markets, all nine style boxes were negative for the quarter. International large-cap growth stocks were the highest performer. Similar to the U.S., small-cap stocks underperformed large-cap stocks across all styles. Source: Morningstar Direct 2020. International markets represented by respective MSCI World EX USA index series (Large: MSCI World EX USA Large, Value, and Growth; Mid: MSCI World Ex USA Mid, Value, and Growth; Small: MSCI World Ex USA Small, Value, and Growth).

A diversified index mix of 65% stocks and 35% bonds would have lost 16.5% during the first quarter.

Lessons For The Next Crisis

This article from Dimensional: Lessons for the Next Crisis recaps what we have learned from past major crisis-related events. The information is very applicable to what we are experiencing right now.

It is difficult to draw useful conclusions based on such
observations; financial markets have a habit of behaving
unpredictably in the short run. There are, however,
important lessons that investors might be well-served
to remember: Capital markets have rewarded investors
over the long term, and having an investment approach
you can stick with—especially during tough times—may
better prepare you for the next crisis and its aftermath.

You, Your Investments, and the Coronavirus

The term “novel coronavirus” is so new, some people have apparently wondered whether it is related to Corona beer. (It is not; it’s named after its crown-shaped particles.) And yet, how quickly it has grabbed global headlines. As the viral news has spread, so too has financial uncertainty. What’s going to happen next? Will it further infect our domestic or global economies? In case it does, should you try to shift your investments to remain one step ahead?

Our advice is simple: Do try to avoid this or any other health risk through good hygiene. Wash your hands. Cover your mouth when you cough. Eat well, exercise, and get plenty of sleep.


But do not let the breaking news directly impact your investment stamina.


If you’re already following an evidence-based investment strategy …

  • You’ve already got a globally diversified investment portfolio.
  • It’s already structured to capture a measure of the market’s expected long-term returns.
  • You’ve already accepted (at least in theory!) that tolerating a measure of this sort of risk is essential if you’d like to actually earn those expected long-term returns.
  • You’ve already identified how much market risk you must expect to endure to achieve your personal financial goals; you have allocated your investments accordingly.

In other words, it may feel counterintuitive, but leaving your existing portfolio exposed to the risks wrought by a widespread epidemic is already part of the plan. All you need do is follow it.

Admittedly, that’s often easier said than done. Here are a few reminders on why sticking with your existing investment plan remains your best financial “treatment.”

Markets endure. We by no means wish to downplay the socioeconomic suffering coronavirus has created. But even in relatively recent memory, we’ve endured similar events – from SARS, to Zika, to Ebola. Each is terrible, tragic, and frightening as it plays out. But each time, markets have moved on. Whether coronavirus spreads further or we can quickly tamp it down, overwhelming historical evidence suggests capital markets will once again endure.

“Journalists who reported flights that didn’t crash or crops that didn’t fail would quickly lose their jobs. Stories about gradual improvements rarely make the front page even when they occur on a dramatic scale and impact millions of people.” — Hans Rosling

The risk is already priced in. The latest news on coronavirus is unfolding far too fast for any one investor to react to it … but not nearly fast enough to keep up with highly efficient markets. As each new piece of news is released, markets nearly instantly reflect it in new prices. So, if you decide to sell your holdings in response to bad news, you’ll do so at a price already discounted to reflect it. In short, you’ll lock in a loss, rather than ride out the storm.

“I’m assuming there will be no apocalypse. And that’s almost always, if not quite always, a good assumption.” — John C. Bogle

If you’re not invested, your investments can’t recover. Few of us make it through our days without enduring the occasional moderate to severe ailment. Once we recover, it feels so good to be “normal” again, we often experience a surge of energy. Similarly, markets are going to take a hit now and then. But with historical evidence as our guide, they’ll also often recover dramatically and without warning. If you exit the market to avoid the pain, you’re also quite likely to miss out on portions of the expected gain.

“[T]he irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” — Daniel Crosby

Bottom line, market risks come in all shapes and sizes. This includes the financial and economic repercussions of a widespread virus, be it real or virtual. While it’s never fun to hunker down and tolerate risks as they play out, it likely remains your best course of action. Please let us know if we can help you maintain your investment plan at this time, or judiciously adjust your plan if you feel it no longer reflects your greater financial goals.


Sincerely,
Squire Wealth Advisors