The market update for March began with “how quickly things can change.” Well, the same can be said for the month of April. While the S&P 500 dropped over 12% in March, April brought the exact opposite, with the S&P 500 rising over 12%, leaving the index down nearly 10% for the year.
The speed of the decline in the magnitude we witnessed was unprecedented, exceeding the declines during the Great Depression. But the S&P 500 has recouped 60% of the drop from its high in February. Many areas of the bond market have recovered, too, leaving some to wonder whether the markets are well on their way to a full recovery.
Yet the world is still reeling from a pandemic. Unemployment filings are rivaling those of the Great Depression, and our food supply is experiencing severe disruptions. U.S. oil prices turned negative for the first time in history, and companies are on the brink of bankruptcy. If things are still so tenuous, why have the markets rallied? Or was April simply the eye of the storm, with a resurgence of rough weather to follow if the pandemic lasts longer than expected or even worsens?
The term used to describe a sharp decline in equity prices in a short period of time is a “waterfall” drop. According to Ned Davis, the waterfall decline from February into March was the worst on record for the Dow since 1929. Similarly, the post-waterfall rally out of March into April was the third largest for the Dow since 1929. Relief rallies are not uncommon during periods of severe market distress and are often spurred by a perceived turn of events such as the government unleashing an aggressive stimulus package. This, along with any positive news coming out of the fight against COVID-19, has helped to calm investors – at least, for the time being.
Though markets seemed to signal in April that there was light at the end of the tunnel, we still have a ways to go before we can be comfortable that equity markets are in the clear. Nevertheless, the markets have recovered sufficiently enough for us to put our feet back into the water.
We mentioned in our interim market update a few weeks ago that we had begun to slowly move the portfolios back into the stock and/or bond markets. The table below shows the broad asset allocation of our six strategies as of the end of May 6:
Although we have raised our exposure to stock and bond funds across our strategies, the exposure is still modest, aside from Sector Rotation. If equities and bonds continue to bounce back, we will be prudent in our process of putting more cash to work in the portfolios. But if we are in the eye of the storm and the skies begin to darken once more, we will not hesitate to take defensive action as we did earlier in the year.
In these trying times, it is our sincere wish that you remain healthy and safe, comforted by family and friends, though distance may separate you. Rest assured that FSA continues to be fully operational and that your advisor is only a phone call away.
Mary Ann Drucker
Assistant Portfolio Director
Disclosures are available at https://fsainvest.com/disclosures/market-update/.