The Markets Generally
For the second straight quarter, there was nowhere to hide. Despite a robust March — the best month for stocks since October 2002 — the S&P 500 Stock Index declined 11%* for the quarter — its worst start to a year since 2001 and the second-worst since 1939. Commodities performed similarly; real estate, much worse. International markets were generally down. The BarCap U.S. Aggregate Bond Index was flat but, once again, this masked the wide disparity of results among the different components (corporate bonds, Treasuries, etc., of various maturities) that make up the index.
Simple blended benchmark returns (based on just the bond and stock indexes) are all negative for the quarter: from -3% for conservative strategies to -9% for those on the aggressive side. More inclusive benchmarks (blending all the asset classes) are two to three percentage points worse: from -5% for the more conservative strategies to -12% for the more aggressive. This phenomenon is a product of so-called contagion — as discussed in our recent special bulletins (archived on our Web site under News Room>News Flashes), in times of extreme stress, virtually all the components of a well-diversified portfolio move downat the same time, contrary to what they do in the vast majority of times. In such rare and extreme periods, asset allocation/diversification exaggerates, rather than mitigates, downside volatility. Fortunately, these periods do not persist and usually end suddenly.
Your Portfolio
Your portfolio (the non-cash portion) performed roughly in line with the more inclusive market benchmarks. In the aggregate, our tactical moves — for example, lightening your exposure to the real estate and finance sectors, overweighting the healthcare and consumer staples sectors, moving into agriculture and further into managed futures, buying selected stocks in our non-strategic sectors — have paid off. They just couldn’t overcome the contagion phenomenon described above. We will continue to make tactical adjustments while monitoring trends in both the volatility of, and the correlations among, the various asset classes we invest in, to determine when it would be prudent to return fully to our time-tested strategic asset allocation and rebalancing protocols.
Observations
Volatility has its benign side. As you have seen, the markets — and your portfolio — can rebound suddenly; in just two weeks in mid-March, the S&P 500 Index shot up over 20%. This behavior is typical of market recoveries. Your portfolio’s losses this past quarter can be erased in a matter of days. The size and unpredictability of these movements are part of the reason that patient asset allocators, like you, do better than market timers in the long run. Why? Because, missing the short-term upsurges can destroy your long-term return — and, over time, the upswings more than offset the declines.
As we have pointed out previously, in addition to each of us personally investing the same way we do for you, the fortunes of Brinton Eaton, as a firm, follow yours — our fees rise and fall with the market value of your portfolio. To make sure that our clients who are subject to our minimum fee do not pay disproportionately, we are continuing for another quarter the temporary 25% reduction in our minimum fee.
* We use “total return” data to express benchmark returns, which assume the reinvestment of all investment income.
Please remember to contact Brinton Eaton Wealth Advisors if there are any changes in your financial situation or investment objectives, or if you wish to add to or modify our investment management services. A copy of our current written disclosure statement as set forth of Part II of Form ADV continues to remain available for your review upon request. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Brinton Eaton Wealth Advisors.
