From their March 23^rd lows, financial markets staged a massive recovery buoyed by record low interest rates, effective fiscal relief packages and confidence the economy will fully recover once a COVID-19 vaccine is available.  On June 30^th, global stocks were down about 7% for the year after declines of 35-43% at one point.

Cornerstone clients fared better, based on steps we took in the second half of March.  Though we covered these in our last Commentary and at webinars attended by many clients, their impact is now more clearly visible:

1. In moving on March 13^th to hold 100% of bond holdings (up from ~50%) in U.S. Government obligations, we expected these to hold their value and be unaffected by whatever happened to stocks.  This has been the case.  Our retired clients hold 7-10 years of withdrawals in these bonds.  Had we known that ten days later the Federal Reserve would announce a first-time-ever program to purchase corporate bonds, we might have implemented this change somewhat differently.
2. From March 23^rd – 25^th, we took advantage of market declines to re-balance your portfolio, add to equity holdings and ‘buy low’.  These additional equity purchases in your portfolio were allocated:

• 65% to U.S. large-cap stocks (SCHX, bought at $52.50 per share, up 41% to $74.10 on June 30^th )
• 20% to foreign large-cap stocks (VEA, bought at $32.41 per share, up 20% to $38.79 on June 30^th )
• 15% to U.S. small-cap stocks (VB, bought at $97.00 per share, up 50% to $145.72 on June 30^th )

1. As a result of this increase to the equity shares held in your portfolio for this quarter’s recovery (the best calendar quarter since 1998) compared to smaller positions during the first quarter’s ‘crash’, your total equity holdings re-gained more than had we done nothing or waited to rebalance.
2. In early April, where possible, we realized (or ‘banked’) losses by swapping to nearly identical alternative holdings so that you can use these losses to offset the taxation of any capital gains whenever holdings are sold at a profit in the future.
3. For retirees using our Dynamic Withdrawal Policies for sustainable retirement income, it would take another 20-25% stock market decline to trigger the ‘guardrails’ that signal a withdrawal ‘spending cut’.

What happens now?  Clearly, great uncertainties about the pandemic’s path and timing remain.  Almost certainly, further market volatility awaits, too.  Fortunately, we do not have to take the risk of being wrong through attempts to predict such events.  Even if markets decline again, the benefits described in #2 and #3 above will remain once a recovery eventually returns stock prices to their current levels.  And as protection, your portfolio holds its ‘cushion’ in the most stable assets on the planet.

Still, having successfully ridden the market’s recovery to this point, it only makes sense to re-balance to a slightly lower equity exposure to protect some of these gains.  We plan to do so throughout the summer.  As part of this re-balancing, we will remove your very small real estate (REIT) position given the difficulties that will remain in the commercial real estate market even after the pandemic.

With best wishes for a summer of health and resilience, thank you for the continuing opportunity to work with you.