Market Pulse – Week ending March 27, 2020

The financial markets viewed the massive Fed intervention and the relief bill from Congress favorably last week and rallied off the current cycle lows, gaining over 10% for the week — a welcome change from the prior weeks of decline.
We are observing two of the three conditions that need to be met before we can emerge from the current Covid-19 pandemic. Namely, the Fed and Congress taking unprecedented action to support the markets and American citizens.They have come through with virtually an open checkbook on both fronts.
However, we still need to see a peak of infections in the U.S., and based on statistics from Friday morning, a peak does not appear in sight, as the U.S. overtakes every other country in logging the most cases of Covid-19 with New York, California, Florida and now Louisiana emerge as the most challenged hot spots across the country.
While this relief rally is helpful, we don’t feel the worst is behind us, particularly when the cause of the economic stress (the spread of Covid-19) seems to be accelerating.
Bear markets historically have periods of violent moves – both down and up. What we are witnessing with last week’s rally is likely a result of quarter-end re-balancing by large pensions, mutual funds and hedge funds rotating to achieve their risk level mandate. Short sellers (those who bet the market will go down), may also be complicit as they “cover” their short positions by buying the stocks they are betting will go down. These factors can certainly be in play this week as well. We will see how the following week unfolds and would not be surprised if we see the market retreat and challenge the low levels reached Monday, March 23.  We are very well positioned to handle further declines from here, having raised additional cash on Tuesday and Friday, providing us more risk exposure to benefit from last week’s rally attempt.
Current portfolios as of March 27th weeks end stand with 29% cash in conservative, 34% in moderate, and 41% in growth. While no one likes to see their accounts down, the fact that the market is down around 18% is far from the damage that would result if it were down lower.
We do anticipate the market will hit fresh lows as the pace of new infections continues to mount, in which case your participation in future declines will be extremely mitigated, given the cash we have accumulated over the course of the past three weeks. Keep in mind that the damage done to date has not reached the levels that would cause longer term harm in recovery, either in the broad market or your portfolios.
A twenty percent decline does not breach a level where recovery would take an unreasonably long time. Remember, a 15% down only requires a 17% gain to get back to even, whereas a 40% decline would require a 60% gain to get back to even. So, if the market does fall off a cliff, your portfolios are very well insulated from decline, and your road to recovery would be short.
Stay calm, wash your hands.

Market Pulse – Week ending March 20, 2020

We hope this note finds you healthy and safe.
As we conclude another week of jaw dropping market movement, we have been busy proactively reducing risk in your managed accounts.
The prior week ending 3/13 was relatively flat but volatile, posting two big up days and three big down days ending down 1% for that week. The current week ending 3/20 was anything but, starting with Monday’s dramatic 10% sell off with a few feeble rebound attempts on Tuesday and Thursday, closing the week down 15%.
The daily moves continued to be historically large, in both points and percentage terms — further challenging the impacts of trading. We’ve structured our process, so we are potentially trading a different fund on separate days of the week. Some trades are on up days, and some trades occur on down days. But we’ve reduced the risk of selling multiple funds on big down days as well as increase the potential to sell on big up days.
Central bankers around the globe have announced monetary and fiscal efforts to maintain an orderly market and ensure that there is enough liquidity in the financial markets to reduce dislocations in the market operations. The Federal Reserve reduced the Fed Funds rate to “near” zero and announced a $700 billion bond buying program to provide some relief to businesses and market participants. They are now talking about and have implemented additional policies that more directly help at the individual level, such as direct payments to individuals, extending the federal tax deadline,  providing some relief from past due bills and mortgage payments, and temporarily deferring student loan interest. These are all actions supportive of a fractured economic environment and go beyond their traditional tools that have been used in the past. Every effort helps us bide our time until we gain additional clarity on the duration and impact of the pandemic.
As written in the prior Market Pulse, we have been proactively raising cash in your managed accounts. Our first sizable “trim” where we sold approximately 10% of each position occurred on 3/5 and 3/6 when the S&P 500 was 20% higher than where we are today. Last week’s adjustments were made at levels on the S&P higher than they are today as well. We had already reduced exposure in advance of the 2 huge 8% and 10% down days on 3/12 and 3/16. There is a high likelihood (though no guarantee) that those initial trims will be put back into the market at levels much lower than where they were sold.
This week we had our most sizable trims to date, further increasing our cash position. As of the end of the week, our conservative portfolio had a cash position of approximately 18%, moderate at 22% and growth at 26%. This protective cash position will additionally insulate your portfolios from further market declines as will the target exposure to bonds, which targets are 40% for conservative, 25% for moderate and 10% for growth. Combined this brings the total non-stock exposure to approximately 60% for conservative, 50% for moderate and 40% for growth.
For our smart beta portfolio’s, we anticipate the upcoming quarterly re-balancing will change the overall allocation amounts to each of the funds, as well as increasing the allocation to lower volatility assets for the upcoming quarter.

Market Pulse – Week ending March 12, 2020

Certainly, everyone by now has heard the market has been throwing up some large numbers – both on up days as well as down days, and has breached a 20% decline from its recent all-time high amid global economic slowdown fears stemming from widespread contagion of the coronavirus.
Times like these can be scary, and opportunistic, and I’ve been spending a lot of time speaking with and writing to my clients to keep them calm and offer perspective on the current situation. I wanted to share a few takeaways from those conversations and my 21 years of experience in providing sound financial guidance.
  •  Now is not the time to panic and let your emotions override your better judgement. Emotional decision making typically results in the wrong decisions — from panic selling to dramatic changes in your portfolio allocation.
  • Periods of calm are better times to evaluate your portfolios and asset allocation to make sure their construct is in harmony with your goals and tolerance for risk.
  • Sure, the market could go down much more. Trying to time the market is extremely challenging, even for professionals. You must be right twice — when to get out AND in, making it twice as difficult.
  • It is imperative that you time segment your risk. If you need to access any investments within a 3-5-year period, they should not be subject to the volatility of risk assets. Keep your riskier investments for longer time horizons.
  • Your long-term returns are very much a function of your entry point. If you have idle cash that you don’t anticipate needing, you are being presented with extremely compelling entry points. Consider exponentially buying into the stock market each 5% decline beyond the initial 10% decline. Take advantage of the current sale prices and increase ownership of high-quality U.S. companies that will continue to innovate and create goods and services that people want and need for decades to come.
  •  If you don’t need to draw from your investments now, it should not matter to you what the value is today. It matters more what the value will be in the future. Keep a long-term perspective. Quality companies will survive and ultimately thrive.
  • If you require regular distributions from your investments now, you should always have ample low risk, cash equivalent or fixed income positions so you are not forced to sell risk assets at depressed levels.
  • Stay calm and wash your hands – this too shall pass.

Market Pulse – Week ending March 6, 2020

In light of the recent market pricing action, our rules-based process recommended reducing risk exposure on Thursday and Friday, March 5th and 6th.
Accordingly, we raised cash last week by selling shares of equity positions in our TWG Sum-It portfolios. We estimate that approximately 9-10% of each equity position was sold to raise cash and provide some protection against further market declines.
Managing your portfolio for purpose sometimes means adjusting the overall risk profile. We will continue to proactively communicate any additional adjustments we make in the future.
We do anticipate ongoing volatility and dramatic price swings as the market attempts to digest the economic impacts of the coronavirus. While we do not know whether the market has seen its worst days, we do know that having accumulated between 6-8% cash in your accounts in advance of Monday’s 7% decline, as well as the risk appropriate position in fixed income (bonds), will help temper the volatility.
Clearly, should the pandemic continue to worsen, economic activity and growth around the globe will decelerate from supply disruptions and less spending by consumers from social distancing. The uncertainty about how widespread and severe the coronavirus will be, as well as the attendant impact on economic growth is causing the market to reprice.
The market will ultimately get to a level that supports a reasonable valuation for public companies around the globe. Markets tend to take such repricing too far (both to the upside and the downside), there will be a point where the value of quality companies becomes too compelling to NOT own, and buyers will return back to market and stage a recovery. No one knows when this will occur, but history suggests there will be a day when the fears begin to abate and investors with a long-term view will recognize stocks sold off more than their long-term future values would suggest is necessary.