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Concerns about the coronavirus triggered extreme market volatility in early March 2020. Investors were challenged by the uncertainty surrounding the economic impact of the virus and how — or whether — they should adjust their portfolios. Here are three key points for investors to remember in times of market stress.

Although the pandemic was a unique event, history can be a guide.

Stocks officially dipped into a bear market with S&P 500 down -30% from peak-to-trough, as of March 16, 2020, according to Bloomberg (see Figure 1). It was one of the fastest bear markets ever based on ratio of drawdown-to-duration (see Figure 2). Throughout this period, exchange traded funds provided investors with an effective tool to allocate capital, trade positions and help manage risk.

Past market slumps have shown that investors should consider remaining patient and constructive. Historically, forward returns after a market bottom have been very strong, with a +22% average return in the next six months.1 This underscores the importance of staying invested even during market drawdowns.

Figure 1: S&P 500 Index sell offs

Figure 1: S&P 500 Index sell offs

Source: Bloomberg, as of March 16, 2020.

Figure 2: COVID-19 was one of the fastest bear markets we’ve seen (speed = peak to trough decline/duration)

Figure 2: COVID-19 is one of the fastest bear markets we’ve seen (speed = peak to trough decline/duration)

Bloomberg as of March 16, 2020.

A large economic impact, but not expansion ending.

We expected a large and sharp economic impact from the coronavirus outbreak, but didn't see this as an expansion-ending event, as long as a pre-emptive and coordinated policy response is delivered (see Market plunge: This is not 2008). During this period we moved back to neutral across equities, credit, government bonds and cash.

The Federal Reserve delivered a historic 100 basis point (bps or 1.00 percentage point) rate cut on March 15, alongside $500 billion of Treasury purchases, $200 billion of agency mortgage backed security purchases, and open market operations (OMO) conducting repo at 0% to support the functioning of markets after liquidity concerns contributed to risk-off sentiment. Absent this policy response, there is a risk to corporate balance sheets — especially for small and medium-sized companies — and significant deterioration could have a sustained impact on the global economy.

Our view was also based on an expectation that the coronavirus outbreak would reduce in severity, with effective containment measures helping to limit transmission and economic disruption. If the virus proves to be a more persistent global health issue, adding strain to healthcare resources and having long-lasting material impacts on supply chains and consumer demand, we would see a heightened risk of a global recession.

Consider focusing on four areas:

Consider adding defensive exposure. We prefer building portfolio resilience through the quality and minimum volatility factors, U.S. Treasuries and gold. With Treasury yields hitting all-time lows, long duration fixed income exposures have acted as a solid hedge for portfolios to help offset equity market volatility.

Large caps outperformed small caps during the coronavirus market selloffs as they are less sensitive to sudden changes in domestic economic activities and small caps typically have inflexible cost structures. The Russell 1000 index outperformed the Russell 2000 by more than 1200 bps.1

In the factor space, the MSCI USA Minimum Volatility Index outperformed the broader S&P 500 index by more than 400 bps from the start of 2020 to the middle of March. Interestingly, momentum was the best performing factor during the same period.2

Don’t forget International investing. The China A Shares index held up relatively well during this period despite the global equity selloff and is the best performing major equity benchmark from the beginning of 2020 to the middle of March, down -12.2% while the broader MSCI EM Index benchmarks fell -31.3%.3

We see monetary and fiscal policy supporting a growth rebound and remain positive on Chinese assets in the long term.

Look below the index level to Industries. Sectors and industries with strong fundamentals and secular trend support performed better during this round of selloffs. For example, large cap technology was still one of the best performing sectors in the beginning of 2020 despite supply chain disruptions, outperforming the broader S&P 500 by nearly 500 bps during this time.4

In past U.S. election cycles, markets have tended to react most strongly towards the end of the campaign. Consider health care industries that have benefited from reduced regulatory risks, government funding and rising demand for medical supplies.

Consider environmental, sustainable and governance (ESG) investing. Investors looking to participate in markets may want to consider ESG vehicles to rebuild strategic equity and fixed income exposures. ESG strategies broadly tilt towards companies with high profitability and low levels of leverage; more profitable companies with solid balance sheets may be better positioned to focus on mitigating ethical issues and introducing sustainable practices than their less profitable peers.