On Sunday, March 1, as of the writing of this report, the Wall Street Journal reported that Rhode Island and New York have their first Coronavirus patients. This and other Coronavirus news opens the question of how investors will react and if there is to be additional backlash in the coming days.
Of course, it was only 11 days ago that the S&P 500 hit a new all-time high. However, just like the Atlanta Falcons in Super Bowl 51, things got bad in a hurry.
In seven business days from hitting that high, the S&P 500 has shed 12.7% of its value, moving into “correction” territory. Generally, the definition of a market correction is when a market declines 10% or more. Losing 20% of its value means the market is in a “bear” market, something we have not seen since March 9, 2009.
In our 35 years of managing the wealth of our investors, Dunham has seen many types of markets, many types of corrections, and our fair share of bear markets.
Our experience tells us that generally, markets move in cycles, many times in large chunks, and typically over short time periods. The market in February was no exception. Based on this experience, Dunham employs a sophisticated strategy that uses alternative investments to potentially absorb some of the risk in the market.
An alternative investment is an investment that historically moves independent of the stock or bond markets. While there are no guarantees and past performance is never an indication of future results, typically, alternative investments will be down less than the market or even show a positive return on days the market loses value.
We saw these alternatives at work in the month of February. Despite hitting a new high for the market in the month, February closed with what we view as a significant loss, yet we believe the strategies most of you invested in did really well on a relative basis. The following are the NET returns for the month of February 2020 of Dunham's N-Share, Asset Allocation Strategies.
MSCI ACWI -8.08%
S&P 500 -8.23%
Core Fixed -1.03%
20% Core Equity/80% Core Fixed -2.15%
40% Core Equity/60% Core Fixed -3.27%
60% Core Equity/40% Core Fixed -4.40%
80% Core Equity/20% Core Fixed -5.54%
Core equity -6.69%
* Please be sure to view the important disclosures at the end of this piece
Please note that the Dunham returns are NET of all fund performance and assumes a model fee using the highest advisory fee of 2.25%. Said differently, these returns are NET after ALL fees and expenses.
However, the real task is getting a handle on what is ahead of us. Unfortunately, Dunham cannot handicap the Coronavirus and its effect on the market. Since we are not doctors, it would be irresponsible of us to suggest the Coronavirus either will get better soon or will get worse before it gets better. Even those in the medical profession are having difficulty accomplishing that.
However, this does not mean we are not keeping our eyes wide open and analyzing data that we see to create our future investment direction.
“While the media has been FIXATED on the Coronavirus” said Jeffrey Dunham, Founder and CEO of Dunham, “The facts seem to suggest that the general direction of cases and deaths is declining. No, it will not improve EVERY DAY. But the general trend is getting clearer.”
One of the hallmarks we view as an important element of Dunham’s investment management is the “Calm, Steady, and Common Sense” approach we take when market conditions become unsettled.
“When you see the Dow drop as we saw last week and news outlets have you glued to every “breaking news headline”, I understand that it can be hard not to re-think your long-term investment strategies”, said Ryan Dykmans, Director of Research at Dunham. “I believe that Buffett had a great quote during all of this when he said, ‘The real question is: Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’
“Clearly’’, Mr. Dykmans continued, “This rhetorical question reinforces the “stay calm” attitude as we make decisions on our client’s portfolios.”
One of the data points the Dunham analysts are keeping eyes on are the effects of past epidemics on the equity markets.
“We have studied the effects of past epidemics on the equity market”, said Jason Greer, Senior Analyst at Dunham, “Last Friday I saw the chart below, which I believe does the best job of summarizing this”.
The information we studied implies that not panicking during these types of epidemics has historically served investors well.
What does Dunham do next in managing your assets?
We remain calm, we stay steady in our approach, and we use common sense in making investment decisions.
We are monitoring this situation and will make needed changes when appropriate.
Please keep in mind that the last correction we had was in the fourth quarter of 2018. Despite hitting a market high 10 weeks earlier, by the time the market closed on Christmas Eve, the U.S. Equity markets were down 19.8%, ready to cross the threshold to a bear market.
However, we did not panic and what followed was 2019 with a 31.5% market advance. What we know is that now equities are cheaper than they were 11 days ago and buying opportunities may have developed.
Dunham will mind the situation in regards to the health of your investments and we ask that you take every precaution to mind your health and your family’s health in the weeks ahead.
Below are Dunham’s fund returns as of December 31, 2019Subscribe to the Dunham Blog