Santander Investment Services
Quarterly Market Update
Santander Investment Services provides a Quarterly Market Update prepared by CLS Investments for our customers to stay up-to-date on the latest insights.
The following commentary summarizes prior financial market activity and uses data obtained from public sources. This commentary is intended for one-on-one use with your Santander Investment Services Financial Consultant only, as a resource to manage assets and evaluate investment portfolio performance.
Quarter in Review
Wow! What a great quarter we just experienced after one of the worst quarters in Q1. In fact, it was hard to find a major asset class that did not deliver returns above cash in Q2. Global stocks were up close to 20% in Q2, after dropping about 20% in Q1. Similar for the S&P 500. In fact, 2020 was the first year since 1932 where the S&P 500 dropped 20% and rose 20% in back to back quarters. Source: Morningstar, as of 6/30/2020.
Many investors are asking: Are we out of the woods yet and can markets move higher? First, expect volatility in both directions—big moves higher and lower—in the months to come leading up to the election.
Chief Investment Officer (CIO) of Orion Advisor Solutions, Rusty Vanneman, points out some reasons to be optimistic:
- The Federal Reserve (and other global central banks) are set to continue to provide support to the global markets.
- Fiscal response has also been massive from around the globe.
- Investor sentiment continues to be negative, which tends to be a bullish sign for stocks.
Then others to remain cautious:
- A pick up in COVID-19 cases in the U.S.
- Trade tensions with China (again).
- U.S. Political season heating up can cause volatility.
In the end, we wholeheartedly believe we will get through this if we stick together and abide by the guidelines set forth by our leaders in health and government. The markets have weathered significant storms before—and they will weather this, too. Stay invested and stay well.
Importance of Rebalancing
The volatility in the first quarter has certainly impacted investor portfolios. Several asset classes have suffered 20%+ losses from their highs. This effect can clearly be seen and even felt. However, other effects may be easier to miss, though they can be addressed through regular portfolio rebalancing. These include passive allocation shifts and risk drift.
Allocations can passively shift dramatically, which can lead to painful losses and missed opportunities if portfolios are not rebalanced. For example, 2019 was a great year for equities, which were up more than 30%. Source: Morningstar, as of 12/31/2020. If you had a 60/40 portfolio (60% S&P 500 Index, 40% U.S. Aggregate Bond Index) at the start of 2019, your allocation would have shifted to more than 65% equity and just 35% fixed income by February 2020 if your portfolio was not rebalanced.
This would have led to underperformance during the latest sell-off compared to a portfolio that was rebalanced monthly. The outperformance is marginal, 47 basis points, but even with the strong equity performance last year, the monthly rebalanced portfolio would have outperformed from the start of 2019.
Another factor for investors to consider is drift in portfolio risk. In just one year, the non-rebalanced portfolio saw its risk drift to a higher level than investors may have wanted. This is a relatively short timeframe, so the numbers may not seem drastic, but we are yet to see the full magnitude of how this may play out.
The current environment would have led the non-rebalanced portfolio to an overallocation in equities, which would have hurt when the market retreated, but the opposite can also hold true. During the 2008-2009 financial crisis, a portfolio that didn’t rebalance became overexposed to fixed income as equities crashed. Again, using our 60/40 portfolio as an example, from the start of 2007 to the lows in March 2009, our allocation would have completely flipped from 60/40 equities to fixed income, to 40/60 equities to fixed income. This would have likely caused issues as the equity market began to recover.
As you can see, the non-rebalanced portfolio would have found itself at a much lower risk level and trailed by more than 10% as the market recovered the following year. The trend persists as the portfolio would have underperformed by more than 3% annually over the next three years.
The chart below shows how the portfolio allocation shifted over that period, leading up to the market decline. At the market bottom, investors who hadn’t rebalanced found themselves at peak fixed-income allocation levels.
As of 3/31/2020.
CLS Investments tackles the issue of rebalancing by ensuring risk budgets stay on target so that a client doesn’t experience the risk drift from asset allocation portfolios such as the examples above. No matter your strategy, it’s important to have a plan so that when sensational times hit, you are prepared to execute without letting fear or panic cause adverse results to your portfolio.
Don’t Rely on Headlines for Investing
Falling markets and drastic headlines can tempt individuals to abandon their long-term investing plans. Their thinking might go something like, let’s wait until it’s over, hoping to catch the market at its lowest point before buying in. Or in rising markets, maybe they seek to sell most of their holdings near the peak. However, timing the market is essentially an impossible task, as the chart below illustrates.
It’s good to remember:
- Headlines shouldn’t dictate when you invest; they may not reflect what’s actually happening in the market.
- A recovery typically involves many episodes of gains and losses that can obscure an overall upward trend.
- Just a few trading days can be responsible for the largest gains during a recovery; being out of the market can mean missing out on the most profitable periods.
It’s understandable to have concerns about market volatility and its effect on your portfolio. The situation in the markets is certainly different this time. However, so far, it follows a pattern we’ve seen many times before and have navigated over the years. Bottom line: The “right time” to invest is usually now, whatever the markets’ performance or news headlines might be.
Stay balanced, and stay the course.
This material is authored by CLS Investments, LLC and is being presented by Santander Investment Services. The information contained in this material should not be construed as an endorsement or adoption of any kind by Santander Investment Services or Santander Securities LLC, who are not affiliated with CLS Investments, LLC. The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed here and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security's price or value may rise or fall.
The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing.
Past performance is not a guide to future performance.
Securities and advisory services are offered through Santander Investment Services, a division of Santander Securities LLC. Santander Securities LLC is a registered broker-dealer, Member FINRA and SIPC and a Registered Investment Adviser. Insurance is offered through Santander Securities LLC or its affiliates.
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