Key Investment Perspectives: February 2020
On January 17, the market seemed poised to post another month of solid gains. Then the coronavirus hit in China, putting an end to the steady stream of new market highs. It’s still too early to estimate the economic impact of the coronavirus, but indications are that it is likely to be serious. China’s GDP performance will most likely show a significant deceleration in growth in the first quarter. The impact on the US and eurozone economies remains small at the moment, but this may change if the outbreak spreads.
When confronted with uncertainty, many market participants react emotionally, making decisions that are not consistent with a disciplined investment philosophy. To help keep us on an even keel, we use a systematic tactical asset allocation process called DART, our Dynamic Allocation Research Tool. In this issue, we discuss:
- The core principles of the model and how it works.
- Our current tactical asset allocation position, based on information generated by DART.
- Performance of major asset classes in January.
- Global Equities: In the US, the Russell 3000 Index was down marginally (-0.1%) in January. Large cap equities were up slightly (+0.1%), while small cap stocks (-3.2%) bore the brunt of the coronavirus selloff. Value stocks (-2.4%) once again underperformed growth equities (+2.0%). Developed international markets (-2.3%) underperformed US equities, with most countries in the red for the month. Emerging markets (-4.4%) were the hardest hit by the coronavirus outbreak.
- Fixed Income: US Treasuries were up 2.4% in January as investors sought a safe haven, pushing interest rates down. The long bond index rose 6.9% while the intermediate bond index was up 1.4%. Within the credit segments of fixed income, high-yield was flat, while investment-grade fixed income (+2.3%) enjoyed strong performance for the month.
- Tactical Allocation: Based on the results of our Dynamic Allocation Research Tool, our stance is unchanged by the coronavirus outbreak: We continue to maintain a neutral position regarding stock and bond allocations.