March 26, 2020 Market Update. Often the advisor’s best-interest path for clients is the hardest road, and for me that has been frequent, incremental de-risking of client portfolios during periods of market strength. This is a labor-intensive selection processes that takes not only many days, but typically all day when trading. For example, with all the trading that has been done (including today), the average client portfolio cash allocation now stands at about 25% (depending on risk profile some higher, some lower). With all the emails I have sent about active trading, many would think that cash would be crazy high by now, but as explained, portfolios will keep some level of market exposure since you simply can’t pick the best recovery days. In the end, inasmuch as the “averaging out” with phased sell transactions is a rather arduous process, this strategy has effectuated the recapture of incrementally more (& more) lost return ground, particularly the past few days with the market recovery action. Markets were up for two reasons today: 1) Federal Reserve Chairman Jerome Powell made appearance on national TV this morning, professing that the central bank still has plenty of tools left to support a U.S. economy: “When it comes to this lending we’re not going to run out of ammunition, that doesn’t happen,” Powell said. Then, 2) the stimulus bill passed the Senate moving the estimated $2 trillion bill to the House as Congress with optimism. Oddly, a very relevant market consideration that would have normally damaged stocks today was bizarrely absent from trading behavior, and that was a horrific jobs report. In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3.3 million, an increase of 3 million from the previous week's revised level and twice the consensus expectations of 1.6 million claims. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. Given the market shrugged off a frightening jobs report that was not only bad, but ended up twice as worse, then this shows that investors are clamoring for any good news; also investors are becoming more immune to reacting to bad news as we have all had more than our share of frightening headlines.
March 24, 2020. We Continued to Sell Risk Assets During Today’s Market Rally on More Stimulus News. We were active sellers of riskier portfolio assets on today’s record point gain day where the Dow finished up 2,113 points (+11.37%) and the S&P 500 jumped 210 points (+9.38%). The increase in client cash balances from our periodic asset sells during market rallies have served three objectives: 1) adds more “dry powder” to purchase equities at lower levels (more liquidity for opportunity); 2) reduce unrealized loss volatility in the portfolio (less future losses) in bear market; and, 3) capital protection provides a layer of sleep at night factor. Also, we have only executed sell trade actions for all client accounts on days of strong market strength. Hence, we are not participating in fear-selling. The government, Fed and the central banks are moving forward to throw $2 trillion at the COVID-19 problem, with the Fed essentially indicating QE will be unlimited. The government stimulus includes tax rebates/checks for individuals, corporate tax relief, small business loan forgiveness, bailouts/aid for distressed industries, extended/enhanced unemployment benefits and public health spending. Similarly, the Fed intends to increase the amount of liquidity in the repo market to highest ever, restarted quantitative easing (QE) by expanding maturity range for its $60 billion/month purchases, started new QE programs, buying $500 billion in treasuries and $200 billion mortgage-backed securities (MBS), allowing banks to use capital and liquidity buffers, etc. However, while this stimulus will certainly be helpful, it is important to keep in mind that back during the 2008 crash, it took four months and -40% in S&P 500 losses before stimulus started to work. Now Trump said he also wants to put people back to work by Easter (or in 2.5 weeks), but during this announcement his head of CDC was notability absent. A model of potential outcomes in the U.S., released by the CDC last Friday, showed as many as 1.7 million Americans could die from the virus, and between 160 million and 210 million Americans could contract COVID-19. Fortunately, those CDC estimates sped up and heightened the U.S. response to curtail the pandemic. These events remain unchartered waters as we just don’t yet know how long until the workforce will be re-engaged, when companies will restart their growth & capital investments, when the consumer will feel comfortable enough to resume the robust consumption of past years, etc. It is our goal to continue to adapt client portfolios to this new reality where we are processing many different data points to execute trade decisions. For example, corporate bonds typically help offset equity losses during market stress, but this asset class has also lost ground due to credit rating worries; thus, we have also taken action to reduce the lower (credit) quality bonds in portfolios. We remain comfortable with cash being a large asset class as we have a significant cash hoard built-up to reenter the capital markets at (hopefully future) bargain prices. It is unlikely that we will pick the bottom, but I would rather pay-up for greater visibility and certainty than trying to catch a falling knife (investing during a collapsing market). I leave you with one of the founding fathers of economics own words, John Maynard Keynes, who said in the 1930s: “Markets can stay irrational longer than you can stay solvent.”
March 21, 2020 Market Update: First, we would like to recap the tone of our approach to the market with our published opinions (& trading actions on client accounts) throughout the market upheaval mayhem (views that were in place at the beginning of the onslaught and collapse): “This portfolio risk reduction action also takes account that other forms of U.S. government stimulus will likely occur, such as bailouts of certain travel/transport sectors, along with perhaps central bank asset purchases. We are also mindful that in a year of elections, incumbents such as Trump will take inordinate action to keep the party going”; “we do tilt portfolio risk down, while also keeping some level of market exposure”; “we have been geared to be sellers on this news and used this opportunity to reduced risk for all client accounts. Insofar as we believe the duration of this financial crises will be shorter than that of 2000 and 2008, the depths of losses could be more severe during the short-term. Again, we believe there will be more bad news than good over the next few months and therefore have been very active in selling..”, etc. For the week, the Dow Jones Industrial Average collapsed -17.3%, the largest weekly decline since October 2008; the Dow is 35.2% below its recent February high. The other major indices dropped by double digits for the week: the S&P 500 Index ‑15.0%, and the Nasdaq -12.6%. Both the S&P and the Nasdaq posted their worst weekly performances since the financial crisis in 2008. We have provided periodical correlation updates on client portfolio exposure to the market losses and what is meaningful is, due to both diversity and actions to reduce risk, the exposure to losses have been shifting lower and lower for our clients. For example, on Friday when the S&P 500 lost -4.34%, the range of loss exposure for our client portfolios was about 0.35%-to-1.35% loss, or a correlation of only 10%-30% loss exposure. In closing, our views have not changed and we will continue to be sellers on any material equity market rally. We continue to believe there will be more bad news than good over the next few months and don’t think the markets have found a bottom yet. Also, we recount another published view “over the 20-year period from Jan-1999 to Dec-2019, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for just missing 10 days of investment exposure. Thus, we need to keep some market exposure as we are not smart enough to know when those 10 days will occur.”
March 17, 2020 Market Update: As we predicted, COVID-19 related economic slowdown just prompted a massive government stimulus proposal of $1 trillion, including an effort to put money into consumers’ pockets. Indeed, Treasury Secretary Steven Mnuchin is pitching Senate Republicans on a package that would include up to roughly $250 billion in direct payments to Americans. The Trump administration is also supporting a request for $50 billion in economic relief for the airline industry as part of the broader package. The $1 trillion package would come in addition to another $100 billion-plus package passed by the House that aims to provide paid sick leave, unemployment insurance and other benefits for impacted workers. As also expected, the U.S. equity markets rallied on this news with the S&P 500 finishing up +6%. As repeatedly conveyed to clients, we have been geared to be sellers on this news and used this opportunity to reduced risk for all client accounts. Insofar as we believe the duration of this financial crises will be shorter than that of 2000 and 2008, the depths of losses could be more severe during the short-term. Again, we believe there will be more bad news than good over the next few months and therefore have been very active in selling this headline for client accounts. It is our view the economic costs of a large swath of U.S. businesses operating with austere staffing, and in many cases at a complete pause, has yet to be fully valued (discounted) in the markets. It just isn’t travel, retail, hotels, sporting events, cruises, concerts, etc., as the consumer is checking out. It is simply hard to imagine the engine of the economy - that being the consumer at 70% GDP - to be a robust participant in broad spending when quarantined. Further, this would not be the time for companies to undergo large expansion, capital expenditure or stock buybacks (which many have agreed to cease).
March 14, 2020 Weekly Capital Market Update. The week was messy, showing signs of sharp fear-driven selling followed by a sharp market rise - U.S. equity markets sold off the highest point loss since 2008, then marked the largest percent gain since 2009. The S&P 500 closed the week off 19.9% from the all-time high, but at one point dropped by about 26%, which technically was in bear market territory (anything over 20%). Market volatility will likely remain elevated, and momentum will likely be centered on the outlook for the COVID-19 (& its impact on companies), juxtaposed with the effectiveness of health containment initiatives and fiscal/monetary policies. We traded throughout the week and will continue to look for opportunities to move portfolios toward more defensive allocations given we still believe the markets have yet to find its lows; there will likely be more bad news than good news over the course of the next 2-3 months. Case in point, fear rhetoric is very powerful and often can bypasses reason, and this panic emotion can cascade into knee-jerk market decisions. For example, more people will be sent on home-leave from work, less items will be available at stores, their friends and family might (at some point) have serious health problems, parts of their community might be quarantined, hospitals might be at overcapacity, then.. how do they react with their investments? Yes, part of the market reaction is the economic toll of COVID-19, but investors' fear-behavior will also inevitably be disruptive to the markets. So, why not just move to cash and sit on the sidelines? Pulling all the way out of the market has adverse implications on a portfolio. Looking back over the 20-year period from Jan-1999 to Dec-2019, if you missed the top 10 best days in the stock market, your overall return was cut in half. That's a significant difference for just missing 10 days of investment exposure. Thus, we need to keep some market exposure as we are not smart enough to know when those 10 days will occur. That said, we do tilt portfolio risk down, while also keeping some level of market exposure. The lesson is investors are only rewarded in the long-run, and that means sticking to your investment plan. Until Friday, the market seemed to be missing the other side of this crisis: The recovery will come at some point in the future as the U.S. will sooner or later overcome the coronavirus, and when this happens the economy will benefit from record low interest rates, extremely low energy costs, tax cuts and stimulus packages. Chances are that the US economy will have a strong recovery when the coronavirus crisis is over, and the stock market would naturally be the beneficiary. However, that likely won’t matter in the near-term as panic emotions fail to be rational and will probably overlook that markets typically recover within 6-12 months of past pandemics, whatever they have been. This isn't some permanent, structural event. Yes, madness of crowds rarely lasts, but that doesn’t mean panic behavior won’t distort markets in the short-term. We already are seeing sharp drops in new coronavirus cases in China and South Korea. Warmer weather and higher humidity of Spring and Summer is expected to also help slow the spread of the virus. As enormous as this pandemic is, the 2008-2009 recession was worse. COVID-19 should be temporary because the world is finally taking extreme measures for containment (along with citizens), and treatments and vaccines will be released in due course.
March 6, 2020 Weekly Capital Market Update. We contend COVID19 will lower U.S. and global corporate earnings this year from the previously expected +9% EPS growth rate, to a lower, declining range of minus (-) single digits. The reality is U.S. business activity has been curtailed, including new overseas investment and international trade, all of which will drag U.S. corporate profitability. Further, we believe prospective consumer sentiment will sour and the consumer has been a driving factor for economic growth. Ultimately, these factors compress valuations going forward and thus we believe portfolio growth exposure should, accordingly, be reduced. While Fed's accommodative action of reducing rates by -0.50% should theoretically be stimulating for the economy, rate action is like using a rifle to stop an ant invasion. For example, with the threat (& fear) of OCVID19, the Fed’s more attractive lending rates simply won’t make people fly to the Olympics, won’t spur people into shopping centers or movie theaters, won’t motivate people to attend global conferences, and certainly won’t urge people to go on vacation. There are simply too many unquantifiable unknowns which the markets have yet to properly process. This portfolio risk reduction action also takes account that other forms of U.S. government stimulus will likely occur, such as bailouts of certain travel/transport sectors, along with perhaps central bank asset purchases. We are also mindful that in a year of elections, incumbents such as Trump will take inordinate action to keep the party going. Fortunately, current portfolio allocations are already substantively diversified amongst many asset classes, which has helped mitigate portfolios from the intense negative market volatility. To be clear, at this stage, we are in no way panicked and not moving to risk-off, but rather taking thoughtful, strategic shifts that correlates to negative impacts on the economy, where the flight path of corporate earnings has shifted downward.