PLANADVISER - July/August 2020 - 15

Duration of U.S. Stock Market Declines and Recoveries, 1972 - Q2 2020
Index of Recovery
120%
100%
2020
1976 - 1978
1981 - 1982
1972 - 1976
2007 - 2012
2000 - 2006
80%
60%
40%
6
12
18
24
30
36
42
48
Months from market peak to trough, and return to peak
For calendar years in which the S&P 500 declined 10% or more-i.e., five instances between 1970 and June 30, 2020-the time from
peak to trough and back to peak averaged 42 months. Indexes of S&P 500 total returns were rebased to 100 at the first month of each peak.
Sources: eVestment; Crandall, Pierce & Co.; analysis by PLANADVISER
investment managers are concocting as many possible
outcomes as they can think of. " We're not thinking Plan A
versus Plan B, but rather Plan A, B, C, D, E ..., " says Vaselkiv.
" The outcomes will vary by region of the world, by states in
the U.S., and south versus north of the Mason-Dixon line.
And there will be dispersion across industries. To put it
simply, we've moved more of our TDF weightings back to the
U.S., for three reasons-the greater strength of U.S. corporations,
our confidence in Fed Chairman [Jerome] Powell and
his commitment to provide unlimited resources, and the
quality of the U.S. capital markets in providing financing to
companies that need bridges to recovery. "
The Yield Quandary
Sometime within the next few years, the swift and enormous
support brought by the Fed and Treasury this year
will restore jobs and commerce in the U.S. But interest rates
may never be the same. Grant points to Powell's vow that
the Fed funds rate will hug zero for the next two years.
Oldroyd takes the idea a bit farther: " I've heard a prognostication
that people in their 40s have probably seen the
last Fed rate hike in their careers. "
Where do such returns leave investors in or near retirement,
who by conventional wisdom are supposed to invest
in the low volatility and generous income of bonds? At the
end of June, U.S. corporate bonds rated AA were yielding just
1.6%. " The individual investor and his or her adviser face
a pair of unusual, if not unique, risks, " says Grant. " One,
the temptation to reach for yield presented by lawn-level
interest rates. And two, the risk of a new inflation that is
almost nowhere acknowledged, let alone discounted, in
stock and bond prices. "
Managers are thus looking beyond the tried-and-true
returns of investment-grade corporate bonds. " High-yield
corporate debt has been one of our meaningful overweights "
in the firm's TDF and other multi-asset portfolios,
says Vaselkiv. " We see that as a lower-risk way of playing
some of the value sectors. You may not know where Ford
common stock will be trading in five years, but, if you have
a five-year Ford corporate bond, you should get your money
back in 2025. " He notes that, at the end of June, bonds of
companies rated BB were yielding about 5% and that high
yield has evolved into a higher-quality asset class than it
was 10 or 15 years ago.
" Because of negative real yields, TDF managers are back
to raising their equity allocations, but that courts a fair
amount of volatility, " Oldroyd says. " I think alternative
assets-bond-like assets that are not bonds-will come into
play more. " In fact, some of J.P. Morgan's TDF configurations
have included allocations to private real estate since 2005.
At Fidelity, Dierdorf incorporates high-yield corporates,
as well as emerging market and floating-rate corporate debt,
into TDF bond allocations. " But it's just 2% or 3%, not the
10% or 15% that it might be when we would think there
was tremendous value. " He also notes a higher allocation to
TIPS: " Many of the policies in place now seem to be intended
to create more inflation, and that's a risk we feel might be
undervalued in the market today. " -John Keefe
54
60
66
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PLANADVISER - July/August 2020

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