The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most global equity markets pushed higher last week as more economies continued to take steps toward reopening. Optimism that a vaccine could become available sooner than many anticipated has also helped to boost market sentiment. Markets have remained quite stable over the past several weeks, even as some economic data has begun to paint a very bleak picture. But financial markets are forward-looking entities and are far more focused on the future than the past. In recent weeks, we have seen a significant rebound in the price of oil as air and road travel have both shown signs of recovery. In the U.S., all 50 states have now taken at least some small steps toward reopening their local economies, suggesting that the worst of the economic pain may now be behind us. However, it will be a long and slow recovery, and it will likely take quite some time before economic activity returns to pre COVID-19 levels.

There are also likely to be a variety of lasting issues that persist as we emerge from this crisis, including higher debt levels, poorly balanced state budgets, and an eroded relationship with China. Total authorized spending related to COVID-19 relief has reached about 12% of U.S. GDP, and it is likely that more spending will be required in the near future as many relief programs have now been fully exhausted. Additionally, lower tax revenues and vastly increased unemployment spending has put some states in a very difficult position with respect to maintaining a properly balanced budget, and it is possible that federal aid may be required, placing further strain on the federal budget deficit. Lastly, the relationship between the U.S. and China has taken a clear step backwards as a result of growing speculation surrounding China’s handling of the virus. While China has continued to emphasize its intention to follow through on its end of the Phase 1 trade deal, the rising friction between the two countries is likely to make it even more difficult for a Phase 2 agreement to be reached anytime soon.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Last week brought a continuation of recent trends, where market performance seemed to diverge meaningfully from underlying economic and market fundamentals. U.S. equities ended the week over three percent higher, while the bond market posted small losses. Oil prices built upon the prior week’s gains, rising by over $5 per barrel as countries around the globe continue to take steps toward reopening their economies. However, oil prices remain extremely low compared to historical norms.

The most impactful market news last week was the release of April’s nonfarm payrolls report, which provided a glimpse into the severity of the economic damage wrought by the coronavirus pandemic. The Bureau of Labor Statistics reported that 20.5 million jobs were lost in April, pushing the unemployment rate to 14.7%, the highest since the World War II era. Adding to the pain was a footnote in the report which suggested that the unemployment rate would have been as high as 19.7% if certain workers were classified differently in the data. Job losses were concentrated (but not confined) in industries most affected by social distancing measures, such as hospitality, travel, and retail. No matter how the data is sliced, the impacts of the pandemic on labor markets has been incredible.

However, while economic data and stock market returns do not necessarily measure the same thing, they are undoubtedly closely related, and many investors are struggling to understand the dynamics that have led to the divergence we have observed in recent weeks. Some of this is likely due to the differences in what constitutes the building blocks of the labor markets/GDP, compared to the composition of corporate earnings as measured by constituents in the S&P 500 index. The most impacted sectors of the economy make up a significantly larger component of the employment picture than they do of the S&P 500. Additionally, stock markets tend to reflect forward expectations, while economic data is a measure of the past and present. Taken together, this suggests that while the economic toll has been extremely high, markets anticipate the future to be better.

As we move forward, markets will likely continue to remain hyper-focused on new information that helps to provide clarity on how soon and how expansively economies can resume some semblance of normality. For now, there seems to be some optimism surrounding the re-opening of some economies in Europe and Asia, which have not seen extreme resurgences in the prevalence of COVID-19.  Markets will also be watching the medical community closely, where the White House has reported that it has “fast tracked” 14 potential vaccine candidates in the hopes that one will prove to be effective and can be made available by early 2021. 

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Stocks and bonds in the U.S. were largely unchanged week over week, although international equities in both developed and emerging markets managed to generate relatively robust returns as efforts to reopen economies continued. Investors also got their first look at a very ugly Q1 GDP figure, which came in at its lowest level since the Global Financial Crisis. Q1 GDP, which declined at an annualized 4.8% rate despite containing over two months of relatively stable economic activity, is expected to pale in comparison to the contraction anticipated for Q2. Though estimates are extremely difficult at this point in time, some economists are calling for Q2 annualized declines of up to 40% (although these estimates vary wildly depending upon the source). Unemployment data is expected to be equally bad, with some calling for that figure to reach as high as 20%.

Three of the world’s major central banks (the Federal Reserve, the ECB, and the Bank of Japan) held press conferences last week and announced continued adjustments to their respective policy initiatives. “Flexibility” was the theme of the week, as bankers hinted that they would be looking to do all that is necessary to preserve liquidity in markets and keep capital flowing to where it is needed. In the U.S., Fed Chairman Jerome Powell announced a further expansion of the bank’s “main street lending program,” making it available to more businesses and lowering the minimum loan size.

Also offsetting some of the market’s ire over the economic data were reports that an antiviral drug developed by Gilead Sciences was showing some promise in clinical trials. The preliminary clinical trials for Remdesivir (as the drug is called) were discussed in detail by Dr. Anthony Fauci during his daily press conferences last week. Dr. Fauci’s apparent confidence in the drug’s promise was quickly followed by announcements that the FDA would likely fast track its path to broader use in severe cases of COVID-19. It is important to note that the drug does not represent a cure for the disease, but it may help to improve patient outcomes. As the scientific community around the world remains fully mobilized, we expect that this will not be the last of promising developments with respect to our ability to fight the virus. However, an effective and well distributed vaccine will likely be required before we can finally put the COVID-19 pandemic behind us.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Most global equity markets moved modestly lower last week as updated manufacturing data came in at record low levels and an additional 4.4 million Americans filed for unemployment insurance. In the past five weeks, over 26 million people have filed for unemployment benefits, which represents about 16% of the U.S. labor force. Furthermore, the supply and demand imbalances that the global shutdown has created in the economy have been enormous, particularly in some commodity markets. Global stay-at-home orders have evaporated the demand for oil, and storage facilities are nearing full capacity. On Monday afternoon, oil prices turned negative for the first time in history as traders were forced to pay counterparties to take barrels off their hands as storage costs skyrocketed. Prices stabilized a bit as the week progressed, but many investors have understandably been asking how such price fluctuations could be possible. The intricacies of the oil markets are quite complex, but the core of the issue is the imbalance between supply and demand, combined with only limited storage capacity in the supply chain. As oil has continued to be pulled from the ground despite limited demand for the final product, storage facilities have approached full capacity. Oil contracts between buyers and sellers settle with physical delivery of the product, and buyers must pay for the storage. But with storage facilities at full capacity, these costs have skyrocketed.

Despite the eye-catching economic data and significant dislocations in commodities prices, equity markets have recovered strongly from their March lows as a result of rising optimism surrounding the reopening of global economies. However, any such reopening must be implemented carefully and in multiple stages. We expect this to be a long process, with additional bouts of market volatility along the way. The resumption of “normalized” economic activity will not occur at the “flip of a switch,” as it will also require a recovery of confidence within society, which will take time. Thus, the ultimate economic recovery will likely not be fully achievable without a solution from the medical community (via vaccine or effective therapeutic). Most credible sources seem to suggest that such a solution is more likely to arrive in 2021 than in 2020, setting the stage for a potentially longer event than some optimists seem to anticipate. However, we continue to remind investors that while its effects may be with us for another year or more, the COVID-19 pandemic will be transitory in nature. As long-term investors, it is important to remain focused on the temporary nature of these challenges and remember that the long-term earnings power of markets will remain intact. 

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
U.S. equities (as measured by the S&P 500) continued their bounce from last month’s lows last week with investors seemingly more focused on the spread of COVID-19 than on economic fundamentals (which continue to deteriorate). Further fueling investor optimism was a growing sense that Congress would move toward passing “Phase 3.5” of economic stimulus. In fact, reports emerged Monday morning that the general belief in Washington is that something will be passed by the end of this week. The ideas being proposed include an expansion of the Paycheck Protection Program (PPP), an additional $60 billion allocated to the SBA disaster relief fund, and additional federal funding for hospitals and COVID-19 testing kits.

Q1 earnings season also kicked off last week, with several of the nation’s largest banks providing investors with the first sense of how corporate leaders are assessing the current environment. During investor calls, JPMorgan, Bank of America, and Wells Fargo all provided a rather bleak near-term outlook and cited historically high levels of uncertainty. The extreme uncertainty across markets is also succinctly represented in current S&P return forecasts, where the difference between the most bullish and most bearish wall street estimates stands at its widest level in history. We continue to remind investors that in such an uncertain environment, the importance of discipline and maintaining a focus on long-term objectives cannot be overemphasized. In the near-term, there are a variety of factors that can move markets in either direction, but in the long-term, we can say with a very high degree of confidence that markets will achieve new highs once again.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
In what might be a perfect example of why market timing is such a fallible investment strategy, the U.S. equity market generated its strongest weekly gain since 1974 last week. Investor sentiment has improved throughout much of the past couple of weeks as new data has started to show signs that the number of new cases of COVID-19 may be peaking. In the United States, the number of deaths projected by epidemiological models declined sharply last week as social distancing efforts have produced positive results. 

Also aiding the market’s recovery has been the unprecedentedly robust response from the Federal Reserve, which announced additional measures last week to expand lending programs in an effort to provide a backstop for businesses, households, and municipalities impacted by the pandemic. As part of these new measures, the Fed announced it would support new debt issuance for corporations which have recently lost their investment grade credit ratings. Such companies, often referred to as “fallen angels” face significant increases in borrowing costs just as the need for cash has increased. Fed Chair Jerome Powell spoke on Thursday in conjunction with the announcement of the new policy initiatives and reiterated that there will be no limit to the aid that the Fed can provide markets, other than where it is prohibited by law. 

Europe Struggling to Pass Fiscal Stimulus
All of the above continues to support much of what we have been communicating in recent weeks, which is that the economic impacts of the pandemic will be immense, but that the impact of swift and robust policy responses should not be discounted. These responses, however, are an important part of the puzzle when it comes to determining what the path forward will look like once we reach the other side. A coordinated and effective policy response will be essential for keeping the economy positioned for a recovery, and this creates potential problems for governments around the world which may still be struggling to find the consensus needed to legislate such a response. In Europe for example, economic crises tend to cause an elevated level of friction between the region’s more robust economies and those that are further behind in their development. Thus far, despite what economists around the globe identify as a dire situation, EU leaders have not been able to come to an agreement on a fiscal response to the crisis as a result of this friction. If the governments of the European Union are unable to reach such an agreement, the economic impacts of the virus could be substantially larger and longer lasting than what is seen here in the United States.  And while we believe that the magnitude of the situation will eventually push leaders to find a solution, the ongoing discussions among EU leaders should be monitored closely.

Quarterly Commentary – Q1 2020

View/Download PDF version of Q4 Commentary (or read text below)

Equities:
We cautioned in our Q4 commentary that equity market returns last year were achieved on the back of stagnant earnings growth, and that “a tempering of return expectations” may be warranted moving into 2020. Of course, nobody could have predicted that just weeks later, the world would be in the midst of a global pandemic and that financial markets would have been thrown into a state of complete disarray. The rapidity with which markets retreated from their highs in response to the global spread of COVID-19 was historic, and largely representative of the massive shock that the disease poses to the global economy. Stocks across virtually every sector lost significant value, and there was largely nowhere for investors to hide. Volatility in the US equity market (as measured by the VIX) reached its highest level in history, surpassing the previous record set in November of 2008. Over the long-term, equity market returns are driven by fundamentals, but the term “fundamentals” was completely tossed aside during the first quarter as the extraordinary level of uncertainty opened the doors for panic to become the main determinant of market prices. Unfortunately, until the world is able to emerge on the other side of “the curve”, a clearer understanding of market fundamentals will not be achievable, and volatility will continue to be the norm. However, it is vital that investors continue to remind themselves that the economic impacts of COVID-19 will be transitory.

Bonds:
What made the first quarter exponentially more painful for investors was that bonds (traditionally viewed as much safer than equities) were not spared from the selloff. In fact, it could be argued that when compared to historical norms, the volatility seen in the bond market was even worse. As fear and panic took hold, buyers disappeared from bond markets just as they did in equity markets, leading to a complete evaporation of liquidity and significant markdowns in bond prices. The Federal Reserve responded swiftly by committing a significant amount of capital as a buyer of last resort, and this helped to stabilize pricing toward the end of the quarter, but much of the damage was already done. Moving forward, default rates on lower quality bonds are likely to accelerate meaningfully. However, because the massive selloff occurred across bonds of all credit quality, many investors in higher quality bonds will likely recoup their losses as their bonds eventually mature and return principal.

Outlook:
It goes without saying that the equity bull market finally came to an end in the first quarter, and it is likely safe to say that the second quarter of 2020 will represent the beginning of the next economic cycle. The transition from one cycle to another is always a challenging time, but we believe there are a couple of key factors that should help to keep investor fears at bay. First, both the Federal Reserve and the US Government are responding to the crisis with full force. We have no way of knowing when life will begin returning to normal and when we will be able to shift our focus to revitalizing the economy. But when that day arrives, the impact of such massive economic policy initiatives should not be discounted. The second factor that should help to preserve some level of optimism is the health of the US financial system. Many investors are still scarred by the 2008 financial crisis, but while the banking system became the epicenter of the carnage in 2008, it is likely to be an essential part of the solution today. In order for us to successfully navigate the economic challenges that lie ahead, it will be vital for the financial system to continue operating at full capacity, extending lines of credit to otherwise sound businesses which have been negatively impacted by the temporary shutdown of the global economy. The good news is that due to the stringent regulations put in place following the global financial crisis, banks come into this situation better capitalized than at any point in history, and are well positioned to do their part.

VIDEO: Q1 2020 Market Commentary
Connor Darrell CFA, Head of Investments offers his perspective on the first quarter of 2020. Connor is working remotely at his home as is our entire TeamVNFA. WATCH NOW

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Last week brought an official end to the worst quarter for equities since the 2008 financial crisis, as the global spread of COVID-19 brought many areas of the global economy to a virtual standstill. In our latest quarterly commentary, we provide a brief summary of what became a quarter to forget, as well as an update on why there are still some key factors that should give investors reason for cautious optimism.

A Note on Our Economic Heat Map
As our economic “Heat Map” has been steadily revised lower over the past few weeks, we wanted to take a quick moment to remind readers that the Heat Map is not intended to be used as a market timing mechanism. Our team tracks a variety of economic data and uses it to guide our ratings for the Heat Map. Those ratings are intended to provide a “point in time” assessment of current economic conditions and help to assess where the strengths and weaknesses lie. Of course, the present state of the global economy is drastically different than it was just three months ago, and that is the reality behind the recent reductions to our Heat Map rankings. At present, there is an incredible amount of uncertainty regarding the depth and duration of the economic impacts of the COVID-19 pandemic. Our key takeaways from the current rankings of our Heat Map are as follows:

The global economy is under immense pressure as a result of the quarantining efforts being put in place around the globe. In the near-term, we are likely to continue to see historically poor economic data. However, the long-term impacts should be reduced by the incredible amount of fiscal and monetary stimulus being pumped into the economy.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investment
Last week brought another series of large swings in equity markets as investors had to balance the still uncertain (though expectedly profound) impacts of government quarantining efforts relating to COVID-19 with historically strong economic policy responses. Markets managed to push meaningfully off of their lows, largely buoyed by optimism surrounding economic policy support. On Monday, the Federal Reserve announced that it would uncap the amount of capital it could pump into financial markets and established other means of providing liquidity to the system. This aggressive action was followed just days later with the passage of a $2.2 trillion fiscal response (known as the CARES Act) aimed at providing aid to troubled workers and businesses. Also hidden in the week’s news flow was a massive increase in claims for unemployment benefits, which skyrocketed to 3.3 million, smashing the previous record of 695,000. Additional data revealed that euro zone and Japanese manufacturing was in the midst of a sharp contraction. We expect the economic data to continue to worsen before getting better but remind investors that much of the negative data likely to come is already expected by markets, which are forward-looking by nature. 

Behavioral Finance: A Primer
Much of our previous communication has been focused on providing our interpretation of the data related to the pandemic, as well as frequent reminders of the importance of discipline. But for many investors who are facing an unprecedented amount of volatility in markets, remaining disciplined is much easier said than done.  As human beings, our brains are wired to address risks and evaluate decisions in certain ways, and in many instances, the mechanics of our cognitive functions can lead us to make investment decisions that may prove to be contrary to our best financial interests. 

Interestingly, there is an entire field of finance that is devoted to studying the psychology of investing. Advancements in our understanding of the human decision-making process have provided practitioners of “Behavioral Finance” with lots to offer in terms of understanding the behavior of investors. In our view, one of the most important benefits of understanding behavioral finance is that we can use our understanding of our own psychology to help improve our investment decision making. Below, we provide a summary of some of the most significant psychological pitfalls and how they may negatively impact us over the long-term:

1. Loss Aversion

All investors hate losing money, but the concept of loss aversion goes beyond this simple notion and suggests that human beings’ aversion to paper losses can greatly impact investment decisions. Specifically, study after study has shown that the “pain” associated with losing money on an investment is more powerful than the “pleasure” derived from earning it. In the midst of a volatile market, this can cause us to feel the urge to take action in an effort to protect ourselves from realizing further losses, even if such action would not be in concert with our long-term investment objectives. In order to combat this desire, it is essential for us to focus on our goals and objectives in an effort to focus on the things we have direct control of over time. This might include making temporary adjustments to our savings and consumption rates or taking advantage of cost-saving opportunities such as lower interest rates, rather than making drastic adjustments to our portfolios.

2. Confirmation Bias

Another flaw in the way we digest information is confirmation bias. Confirmation bias occurs when we inadvertently place higher emphasis on data or information that supports what we already believe, rather than taking it into consideration at face value. For example, if we believe strongly in the resiliency of the U.S. economy, we may overemphasize positive information about U.S. stocks and discount whatever negative views we may encounter that do not support this belief.  For many of us, this bias may lead to us rushing to sell positions that have underperformed on a relative basis and flock to those that have performed better. Giving in to these types of biases can cause us to sacrifice proper diversification in our portfolios at the precise time that diversification takes on heightened importance.

3. Herding

Herding is the behavior that leads to our desire to “follow the crowd.”  This is often driven by fear of regret or of “missing out” (also known as FOMO). Throughout history, there are a plethora of examples of points in time where market sentiment reached levels that were far too extreme (this includes periods that fall in both bull and bear markets). In these instances, those who were able to refrain from following the popular decision (whether that be to buy more when stocks were expensive, or to sell when markets were in peril) have often come out ahead. Given the volatility we are experiencing now, it is important for us to take a step back and develop our own conclusions rather than simply following the trend.

4. Illusion of Control

Illusion of control bias is a bias in which people tend to believe that they can control or influence outcomes when, in fact, they cannot. One example of this bias in a practical study occurred when a social experiment conducted in the 1980’s found that people permitted to select their own numbers in a hypothetical lottery game were willing to pay a higher price per ticket than subjects gambling on randomly assigned numbers. The belief that we have more control than we really do on the outcome of our investment returns can lead us to take inappropriate action within our portfolios. To combat this, it is important to think of investing as a probabilistic activity, and that the probability of different outcomes is beyond our control. During periods of market stress, it can be easy to lose sight of the fact that long-term returns are driven largely by circumstances beyond our control, and that the probability of experiencing positive returns increases with an investor’s time horizon.

5. Representativeness

Representativeness is a type of selective memory that causes us to place too much weight on recent evidence rather than taking a more holistic approach to decision making. This can cause investors to focus too much on short-term performance without considering the evidence that may be found in the more distant past. With markets having fallen so quickly from their highs, there are likely to be many high-quality stocks out there which still have very promising long-term prospects but may have fallen considerably off of their previous prices. If we become too concentrated on the recent past, or even on the fact that these businesses may operate in industries that could be particularly troubled in the current environment (i.e., energy or consumer discretionary), we may be more likely to lose sight of the business’ strengths. All of the above biases are particularly important to consider in the current investing climate, because they can lead us to make suboptimal decisions during a time of stress. Behavioral economists have found that we can help to reduce the negative impacts that our cognitive biases may have on our decision-making process just by simply acknowledging that they exist. This can help us to remain more objective and less emotional when considering what (if anything) should be done to adjust our portfolios in this time of uncertainty.

Special Market Note: Update on COVID-19

by Connor Darrell CFA, Assistant Vice President – Head of Investments “There are decades where nothing happens; and there are weeks where decades happen.” (Vladimir Lenin)

It may seem counter to open a discussion about financial markets with a quote from a communist leader, but we felt the above was a perfect summary of what market participants have experienced recently (and last week in particular). In this iteration of The Weekly Commentary, we aim to put some of the volatility in context, describe what we view to be a much needed and potentially historic economic policy response, and hopefully address some of the concerns many investors have in this uncertain environment.

Situation Report
In just a few weeks, the COVID-19 pandemic has completely transformed the global economy and caused a massive re-pricing of risk across virtually all markets and asset classes. The uncertainty of the situation is in many ways unprecedented. The world has not faced a pandemic of this magnitude in over 100 years, and the economic costs of government attempts to slow the spread of the virus are likely to be immense. As a result, investors are understandably scared, but the types of market movements we have observed in the past few weeks only occur when panic and fear become the primary determinants of price, rather than fundamentals. The problem for markets is that the fundamentals are very uncertain at this point in time, and it is unlikely that this uncertainty will dissipate for the next several weeks.

With that as a backdrop, it is entirely plausible that markets fall further before finding a bottom. Investors should prepare themselves for poor economic data (particularly with respect to the labor market) and the continued increase in the number of cases to spark further volatility in the weeks ahead. Importantly, the slew of bad news we are likely to see in the coming weeks makes it all the more essential for investors to remain grounded to the core principles of investing discipline. These principles include employing a disciplined rebalancing strategy, maintaining a properly diversified portfolio, keeping focused on the long-term, and avoiding making emotional decisions. As much as it can feel otherwise when we are going through them, bear markets are temporary events. Pandemics are temporary events as well, and we expect that the economy will emerge on the other side without having suffered major damage to productive capacity, which is something that cannot be said for all economic shocks throughout history.

The Policy Response
In our view, this challenge will require a coordinated and targeted response using both fiscal and monetary policy tools. We are looking for (and expect) an historic response to this global crisis from policymakers. We have already seen the Federal Reserve step in to address the first key issue, which is a lack of liquidity in the financial system. Through open market operations which involve buying bonds from those looking to sell them (also known as Quantitative Easing), the Federal Reserve has committed an enormous amount of capital to provide and ensure stability in markets. We anticipate that these policies should provide some relief in the weeks ahead and continue to rate the monetary policy environment as “Very Positive” in our economic heat map. 

There has also been heavy focus on congress as investors have clamored for a fiscal response to the crisis, and we remain optimistic that differences will be worked out and that a bill (possibly more than one) will be passed. The initial task for policymakers is to provide relief to those who need it while quarantines remain in place and the spread of the virus runs its course. This will likely take several weeks. During this time, fiscal policies should be targeted at expanding the social safety net (through increased unemployment benefits and paid family leave) as well as providing bridge loans for cash-strapped businesses unable to operate with society at a standstill. Once the rate of contagion has begun to turn downward (which is likely several weeks away), we then expect the passage of a more traditional stimulus package aimed at spurring economic demand.

Balancing Near-Term Gratification with Missed Opportunity Over the Long-Term
All of this is rather complex, but the crux of the matter is that while the impacts of the coronavirus pandemic are not likely to subside in the near-term, the eventual return to economic activity is likely to be aided by historically powerful fiscal and monetary forces. All of this suggests that it will be exceptionally difficult to time the bottom, and investors who exited risk assets during the worst of the crisis are unlikely to be able to re-enter the market at the right time. If markets continue to slide lower before finding a bottom, those same investors may experience a period of gratification in the near-term as a result of having avoided additional losses, but are just as likely to have made themselves worse off in the long-term as a result of missed opportunities for healthy returns on the back end. In short, maintaining discipline and managing emotions is key. At this point in time, it is safe for investors to approach the current environment as the start of a new economic cycle. This new cycle will bring with it its own set of characteristics and opportunities. Perhaps value stocks will finally regain market leadership? Maybe international equities will once again find their footing relative to domestic stocks? How can I construct my portfolio to maximize my opportunity to achieve my long-term financial goals? The first two questions speak to the concept of diversification. We simply do not know which types of stocks will lead the way in the next cycle (though valuation can provide us with some clues), so a balanced approach is needed. With respect to the third question, bond yields currently stand at historically low levels, making it exceptionally unlikely that goals can be achieved without exposure to equities in a portfolio. All of these questions may seem trifling in the face of a near-term global crisis but are exactly the types of issues that long-term investors should be focused on, because these are the things that ultimately determine investment success over a full-time horizon.