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Fixed Income Q&A

Although the volatility remained heightened this week, there was much back-and-forth. The S&P 500 finished the week down ~2%, which seems relatively uneventful given the previous 6 weeks. The news cycle is rapidly changing and epidemiological modeling continues to suggest rising rates of infection and mortality among Americans.

The economic impacts from the virus continued to dramatically effect employment this week, as the new weekly data showed 6.6 million unemployment claims, supplanting the record 3.3 million unemployment claims from last week. The economic impact of the mitigation efforts is truly staggering.

It seems health and economic news will get worse before it gets better. However, we suggest separating health and economic news from the markets. As Capital Group suggests, markets have historically been leading indicators of economic data and have bottomed in advance of previous economic bottoms.

Below is this weekend’s recommended reading:

Words of Wisdom From William Bernstein (Ben Carlson, A Wealth of Common Sense)

This is a good video interview between one of our favorite writers – Ben Carlson – and famed author and investment advisor Dr. William Bernstein. This interview has several interesting points as it relates to the current economic environment, asset allocation, sequence of return risk, etc.

Two key points of emphasis from the interview. (1) For those at or nearing retirement, an allocation towards less variable fixed income and cash can assist in weathering difficult market periods like this one; and, (2) For young investors, treat these types of market environments as opportunity to build an investment portfolio at cheaper prices.

As this note suggests, 95% of those big “once or twice in a lifetime drops” since 1871 have returned to even in 3-4 years after the drop. This highlights what we have been discussing over the previous weeks. Generally, we recommend up to 5 years of distribution requirements set aside in a fixed environment.

Fixed Income Q&A: Liquidity, High Yield & Muni Bonds — & What to Do Now (NT Asset Management)

One of the strange anomalies in previous economic and financial crises is that traditional diversification has tended to fail for short periods of time. As Bernstein outlines in the above interview, there’s an old saying in financial markets that, during times of crisis, “Correlations go to 1.” What this means is that, generally, there is a rush to sell everything during a crisis, even asset classes traditionally deemed “safe.” As a result of this rush to sell everything, bonds have declined in value during crises alongside stocks. This period has been no different, as fixed income securities experienced downward volatility during March. This is a great Q&A on the state of the fixed income markets.

Stay Agile Investing In The Ides Of March (Silverlight Asset Management)

As Silverlight points out, the question now on investors’ minds is whether the economic recovery will be “V-shaped”, “U-shaped”, or “L-shaped.” Basically, V-shaped being the most optimistic and L-shaped being the most pessimistic. No one knows the answer to this question. Silverlight suggests that this contraction can be, to date, categorized as an event-driven bear market, which would suggest a V-shaped recovery. In historic event-driven bear markets, the decline has been steep while the length of decline and the time to recover has been short. Time will tell, as the modern era has not dealt with a global pandemic followed by a forced economic shutdown. The solution is to have a plan and remain committed to a long-term strategy, insofar as your risk tolerance allows for short-term and possibly intermediate-term discomfort.

We hope everyone has a happy and safe weekend. Please give us a call if you have any questions.


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