Risk to investors can be defined in many ways. A traditional measure of investment risk, standard deviation of returns, tells us what the historical variation of return has been around an average return. That is a good textbook measure but is a bit academic for real life investors. Instead, most investors now like to look at “drawdown”, a measure that shows a percentage lost from recent highs, i.e., “peak-to-trough”.
The Great Recession emanating from the financial crisis in 2008 produced a well-documented drawdown of -55% in the S&P 500 hitting its low on March 9, 2009 retracting from its high on Oct. 9, 2007. The duration of that drawdown lasted 1.4 years.
How does this drawdown compare, so far?
As far as duration goes, we have just started! The recent S&P 500 high was on February 19 and the low was hit on February 28, so this drawdown period has lasted just 9 days – and we are currently off the lows!! The drawdown percentage so far is -12.4%.
But, most investors have a diversified portfolio of stocks and bonds. How have these portfolios done compared to an all-equity portfolio made up of just the S&P 500.
I like to look at a series of relative risk indices produced by S&P Dow Jones Indices. They provide index values for global risk-based model portfolios ranging from Conservative (20% stock and 80% bonds) to Aggressive (100% stock) in 20% increments. As you can see below, thanks to the impact of the rallying treasury and investment grade bond markets, as of now the drawdown percentages are modest compared to an all-stock portfolio. A moderately conservative diversified portfolio is down only -3.3% from its recent high, a moderate portfolio is down -6.4%, but a moderately aggressive portfolio is down -9.2%.
No one knows what the long term impacts of the coronavirus will be and how long this capital market turmoil will last. Certainly, fear has gripped the market as demonstrated by the volatility and 1,000-point swings on the Dow and the tremendous flight to quality we have seen in the treasury bond market. We continue to monitor the situation closely and continue to be hopeful for a relatively quick resolution as we have seen in other health crises. Actions by the Fed are helpful, but we look to prudent actions from local, state, and federal governments in the U.S. and around the globe to alleviate the situation.