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In an uncanny repeat of January, US equities reached all-time highs in the first 12 trading sessions of the month, only to decline over the final two weeks as a result of growing fears over the breakout of the COVID-19 disease. Markets shifted to high alert and quickly priced in a potential severe adverse impact on the US economy and corporate earnings.

While the final impact of the coronavirus is unknowable at this time, we believe that an examination of comparable pandemics in the past can offer useful insights. In this issue, we analyze six global outbreaks similar either in scope or new forms of pathogens. The historical analogues may provide little in predicting the path of COVID-19 in terms of economic and market impacts, but they do offer some historical context in terms of severity.

In addition, this issue summarizes the performance of major asset classes in February and our current tactical asset allocation positions.

Key Takeaways

  • Global Equities: From the peak on February 19, US equities fell 12.7% to post a decline for the month (-8.2%). Growth continued to outperform value as investors favored companies with better structural growth prospects, while domestic small cap equities (-8.4%) underperformed domestic large caps (-8.2%). Developed market international equities fell almost 9% in February, and emerging market stocks declined 5.0%.
  • Fixed Income: US Treasuries gained 2.65% for the month and remained the global safe haven during the selloff in February. Long-duration bond yields fell from 1.51% to a record low of 1.15%. Investment-grade corporate bonds increased 1.34% in February as high-yield corporate bonds fell 1.41% during the month.
  • Tactical Allocation: Based on our Dynamic Allocation Research Tool (DART) and discretion allowed by our Asset Allocation Committee, we remain neutral to equities, fixed income, and cash. Within equities, we favor higher-quality companies and lower-volatility stocks. Within fixed income, we recommend maintaining a neutral stance to the benchmark on duration and an underweight to high-yield debt. For certain investors, we believe that alternatives can provide valuable diversification benefits to a portfolio.

About Brett Hillard, CAIA, CFA

Brett Hillard, CAIA, CFA is a Senior Investment Analyst with the Portfolio Strategy Team and has over 10 years of investment analysis experience. He leads the alternative investment research and due diligence process at Key Private Bank and provides quantitative modeling for portfolio construction. Brett has expertise in evaluating hedge fund strategies, private capital strategies, and traditional investments. He is integral in the management of several multi-asset strategies across high-net-worth individuals and institutions.

Brett joined Key in 2007 as an equity analyst with a focus on the Consumer Discretionary sector. Prior to joining Key, Brett worked at Apple Growth Partners, providing valuation analysis and reports for closely held companies. Brett holds a BA in Finance and Business Economics from Ohio University. He has also earned the Chartered Alternative Investment Analyst and Chartered Financial Analyst designations.