A nice rebound, but far from out of the woods
Just when we thought it couldn’t get any worse for the markets, it actually didn’t. April saw a significant, and well-advertised, rebound in market levels. This actually left the broader indices, like the S&P 500 and MSCI’s ACWI index down a little over 9% and 13% respectively, after dividends, for the year-to-date (“YTD”). Given the beating that the Value and Small Cap sectors took in the selloff, they staged a more vigorous recovery, based on expectations of an economy that might emerge sooner than expected from the deep downturn it is currently experiencing.
Equity markets are forward-looking and will likely attempt to price in any expectations for improvement they can latch on to. Value and Small Cap Equities benefited from this with indices rising anywhere from 12% to as much as 24% for the month of April. But, in what might seem like a brief math quiz, this still left those sectors of the market off anywhere from 22% to as much as 38% YTD. International Developed and Emerging Market Equities, which markets think may struggle more than the US economy to emerge from this crisis as quickly, only recovered by roughly 6% and 9%, respectively. Expectations for further regionalization and away from global supply chains and integration post-virus will weigh on non-US markets until we have further clarity on how less-developed economies weather this storm.
So how do the Equity portfolios remain allocated? As we entered the month, with an overweight to the US and with an overweight to Momentum, Low-volatility, and Small Caps sectors. The strength in Value and Small Caps were additive to performance, with the Equity portion of portfolios marginally exceeding, for the first time in many months, the performance of the benchmark ACWI index. We saw a small reversal of that outperformance over the month-end and the fundamentals will ultimately determine how this all plays out. The metrics still compel us to have exposure to Value and Small Caps, which have underperformed for the better part of the last five years, and there is precedent for their strength on a recovery in the economy and markets.
For balanced accounts, after what had been an extremely volatile month for Fixed Income assets in March, April watched all credit-sensitive sectors recover marginally with our Fixed Income allocations gaining roughly 1.6% on the month and leaving them basically flat on the year. For our Multisector exposure in the FWDB ETF the portfolio remains conservatively allocated 85%+ to short maturity US Treasury and Agency ETFs with the balance in short maturity High Yield ETFs. We will need to see sustained lower volatility levels before the model reallocates more significantly to higher-yielding sectors.
Source: Morningstar
