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A balanced portfolio comprised of stocks and fixed income (bonds) has been historically designed to diversify the risk of stocks. There is a historically favorable correlation between stocks and bonds – meaning typically, when stocks decline, bonds tend to perform well.

However, in the last two weeks ending Friday March 20, 2020, the S&P 500 has shed –22.37% (1) of its value. Fixed income has not been the pillar of strength that typically anchors a diversified portfolio of stocks and bonds.

For the two-week period ending March 20, 2020, there were no fixed income categories in the Morningstar universe that were positive (2). Even the Ultra short bond category was down -2.90% and -2.92% respectively for the ETF and Open End funds(2).

Short-term Treasuries provided a positive return, but the 30-year Treasury lost -7.31% of its value. The 7-year, 10-year, and 20-year treasuries also produced negative returns.

For us, the biggest anomaly from a historic market standpoint were the corporate bonds. When people say, “credit risk”, it sometimes sounds like they are saying that someone is buying far down the credit spectrum, as in High-Yield bonds.

Even AAA-rated corporates in this most recent environment as measured by the BofA Merrill Lynch AAA US Corporate Index declined almost -16% in the two-week period ending last Friday. High-Yield Bonds as measured by the BofA Merrill Lynch US Cash Pay High-Yield Index were down over 17% during that same period. (1)

Therefore, while the S&P 500 lost -22.37%, investment-grade bonds did not fare much better, as the sellers of bonds in the last couple of weeks did not discern between high-yield and investment-grade when they dumped bonds.

Even gold, which historically does well in times of fear as we currently have, lost -11.24% of its value in this two-week period - as investors dumped many assets in fear of the current situation.(1)

While we believe this two-week period was driven from a “dump-everything” mentality, we also believe that it has created value that will be taken advantage of as investors return to the markets.

(1) Source: Bloomberg

(2) Source: Morningstar

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