Investors Tread Uncharted Waters

By Bruce DeLaurentis - April 2020

Investors have been subjected to unprecedented volatility since the stock market peak in mid-
February. Not just equities, but even short-term investment grade corporate and municipal fixed income
securities have exhibited wild swings in price. These are securities that in normal times serve
as a safe haven when market conditions are somewhat turbulent. However, there are rare instances
when markets are under such severe stress that even these securities are vulnerable to panic selling.

A similar period existed in September and October 2008 during the later stage of one of the worst
bear markets in history. The peak for the S&P 500 occurred a year earlier, so astute investors had
plenty of warning to adjust portfolios accordingly. Some did not heed the warning. Between
September 9 and October 15 2008, the Bloomberg Barclays US Aggregate Bond Index, considered
to be representative of the total US bond market, suffered a 4.7% decline. The same index suffered an
even worse 6.3% decline between March 9 and March 19 of this year, but the decline occurred only
three weeks after stocks topped. This bear market is unfolding in a much more compressed time
frame. In fact, by some measures, we’ve just witnessed the most severe decline over a short period
of time in history. At its low point on March 29, the S&P 500 Index was off a whopping -33.9%
from its closing high just a month earlier. High-yield corporate bonds, the focus of the
Managed Income Strategy, were not spared. The Merrill Lynch HY Index was down -21.5% from
peak to trough.

The primary culprit for all this market turmoil is the sudden spread of the novel coronavirus across the
globe, and secondarily the long-running collapse in the price of oil. In response, monetary
authorities and Congress felt compelled to act to stem the hemorrhaging of the market and the
economy. The Fed initiated two emergency rate cuts, bringing the Federal Funds benchmark
interest rate to almost zero. Furthermore, the Fed opened its checkbook to support the bond
market by buying Treasury and mortgage-backed securities. Additional measures have been put in
place as well. Congress followed by passing a massive $2 Trillion economic relief plan designed to
assist American businesses and tens of millions of households. In response, the markets staged a
violent rally, with investment-grade bonds recapturing most of their losses. Stocks, on the other
hand, recovered only partially and are still showing large losses.

Fortunately, Managed Income’s sell discipline prompted us to exit the market and move to a
defensive position in early March, well before the worst of the decline got underway. No one likes to
give up profits, but the bulk of our principal has been preserved to take advantage of the inevitable
buying opportunity that will emerge once the bear market ends. Declines of this magnitude are
typically followed by periods of above-average return, so it’s important to bear in mind that the
strategy does best during recoveries from bear market declines.

The question in everyone’s mind is, “Where do we go from here?” I’m not confident that the
ultimate low has been seen. Declines of this nature usually require a multi-week basing process to
finalize a bottom. That to me is a best-case scenario. No one knows how long and to what degree the
novel coronavirus will suppress economic activity. For now, it’s prudent to err on the side of

Best regards,
Bruce P. DeLaurentis

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