After having avoided several near misses, US equities fell into bear market territory for the first time in more than 11 years, plunging a dizzying 32% from record highs registered just one month ago and ending the longest bull market in history.
The âCoronavirus Crashâ has been one of the swiftest peak-to-trough markets decline ever, and the hibernating bear has come roaring back in a major way. In addition to materializing swiftly and suddenly, the bear market has been widespread, with nearly all asset classes (save cash) experiencing losses in the past few weeks. As a result, many investors are justifiably asking, âWhat should I do now?â
First and foremost, Key Private Bank strongly believes that investors should not panic and abandon their long-term plan, nor should they eliminate equities from their portfolios in a wholesale manner. As the primary growth engine for most portfolios, equities will benefit from future economic expansion once it re-emerges.
That said, it is also important that investors carefully evaluate the types of equities represented within their portfolios and consider making some minor tweaks during this time of extreme uncertainty.
While we reiterate our view not to sell equities indiscriminately, we urge investors to enhance an existing equity portfolio by adding high-quality companies and pruning lower-quality companies. High-quality companies are those that exhibit above-average and relatively enduring profit margins, possess lower levels of leverage on their balance sheets, and are led by experienced, proven, and aligned allocators of capital.
Low-volatility stocks represent another category of equities that can provide some cushion during a bear market. As their name suggests, these stocks are intriguing for their defensive asymmetric attributes: They participate in up markets but decline less than broad market averages in down markets when volatility typically surges. Similarly, large-cap growth stocks tend to outperform their small-cap value counterparts during bear markets when, in general, earnings growth is scarce.
Understandably, bear markets trigger emotional responses in all of us. Fueled by an incessant cascade of negative events, recency bias can stoke fear and cause investors to extrapolate the present to the future, often leading them to overreact or freeze in place. In our view, while it may still be premature to add aggressively to equities just yet, we think investors should assess the types of equities they own and consider upgrading their portfolios during this time of immense uncertainty.
We also advise investors to be mindful of potential opportunities to improve the diversification of their portfolios and help position them for the future. Sunnier days will arrive, and we believe that investors who remain deliberate and disciplined, do not allow themselves to be overtaken by panic, and seek opportunities to upgrade and enhance their portfolios will be rewarded over time.
Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. Âİ 2020. CFMA 200323-769447
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