Stay Agile Investing In The Ides Of MarchSubmitted by Silverlight Asset Management, LLC on March 31st, 2020
“Beware the Ides of March,” a soothsayer told Julius Caesar in Shakespeare’s famous play of the same name.
Whether you believe in superstitions or not, March of 2020 will go down as a historic month on Wall Street. After peaking on February 19th, the S&P 500 fell 34% in just 23 trading days, marking the fastest bear market ever.
Stocks have since rallied back. But the overall surge in volatility has been breathtaking. For perspective, the S&P’s average daily move this month was 5.14%, which easily tops the previous record of 3.90% (November 1929).
Many are now opining on whether it will be an L, U or a V-shaped recovery.
Truth is, nobody knows what comes next. There is no way to backtest for a global pandemic in the modern era.
THIS is the test. We’re living it.
Thus, if you’re an active investor, now is a time to stay agile in your thinking.
Stay Agile Revisiting Your Asset Allocation
Sometimes events come along that teach us what our true risk tolerance is. COVID-19 has shaken up daily life and many portfolios. If you lack confidence in your current strategy, what should you do?
My advice would be to revisit your financial goals, starting with two questions.
- Is your financial plan still on track?
- What is the required return to fund your goals?
Bear markets are scary, but also totally normal. A bear market should not derail a well constructed financial plan. You can sanity check yours by having your financial advisor run monte carlo simulations based on current values.
Even if your retirement plan is “on track,” you may still want to lower volatility. And that may be totally fine, but it depends on your situation.
Hypothetically, let’s assume the 5-year annualized return from a traditional 70/30 portfolio (70% stocks, 30% bonds) is 8%. For a 50/50 portfolio, the expected return is 6%.
Based on the laws of compounding, that 2% difference will turn into a meaningful spread over time. But if someone doesn’t need the extra return, they don’t need any extra headaches. It might make sense to focus on reducing tail-risk.
Stay Agile Following Fundamentals
COVID-19 and the corresponding shuttering of businesses will exert a heavy toll on the near-term economic outlook.
Goldman Sachs GS forecasts a 34% GDP contraction in Q2 and sees the unemployment rate jumping to 15%. Meanwhile, consensus expects earnings-per-share for the S&P 500 to fall 10% in Q2, and that number will likely drift lower.
The magnitude of the economic slowdown won’t ultimately be as pivotal as the duration. Many firms can handle a few months of business disruption, but not much more. The speed of normalization is the key factor.
For now, Goldman projects a swift rebound. The investment bank forecasts GDP to rise 19% in Q3, aided by fiscal and monetary stimulus.
Policy Response. It’s easy to anchor to today’s negative headlines, but don’t dismiss the magnitude of recent stimulus measures. Here’s a quick summary.
- Total spending so far is around $2 trillion, which equates to 9.5% of GDP
- Most will be paid out in 2020
- Required Minimum Distributions (RMDs) are optional for 2020
- Early 401(k) withdrawals are permitted in certain cases
- Many households will soon receive ‘helicopter money’ via checks in the mail
- $500 billion in loans and business assistance programs for big companies
- Small businesses will have access to a separate $350 billion facility
- Unlimited QE program
- New facility to buy investment grade corporate bonds and bond ETFs
- Relaxing bank capital rules to encourage more lending
- Extra liquidity to aid money markets, commercial paper and muni debt
Valuations. Bonds have enjoyed a spectacular 40-year bull market, but yields simply can’t go much lower. The max upside from here on a 10-year treasury bond before the zero boundary is roughly 7%.
Equities offer better value. Per Bloomberg, the cyclically adjusted earnings yield for the S&P 500 is 4.8%. The earnings yield of the MSCI World ex USA Index is 6.5%, making international stocks an even better bargain.
Bear markets are a great time to tactically shift country exposure. For more on why that is the case, you can read this article: 2 Major Investment Cycles Are Nearing Peaks, Here’s How To Prepare.
Stay Agile Monitoring Technical Levels
Since 1929, the average bear market has declined -39% and lasted about 2 years. However, that doesn’t automatically imply a long, arduous bear market lies ahead.
Every bear market is different, with most falling into one of three categories.
- Structural bear markets are triggered by structural imbalances and financial bubbles, often resulting in price shocks and deflation.
- Cyclical bear markets are part of a normal business cycle and typically commence during periods of high inflation and rising interest rates.
- Event-driven bear markets can be triggered by policy mistakes or any sudden shock. They typically lead to a sharp market decline but not a long recession.
So far, this is an ‘event-driven’ bear. Historically, these bear markets are shorter, less severe, and take less time to recover than structural or cyclical bear markets.
Source: Hyde & Union Content, Goldman Sachs Global Investment Research
While we can take some comfort in the above, we still need to monitor incoming data.
The “Coronavirus Crash” has been fast and ferocious. A lot to absorb.
The novel coronavirus is also one of the most discounted events ever.
Think about it: COVID-19 is literally everywhere. It’s all anybody talks about. It dominates the media. We’re even reminded of it driving on the highway.
Scary signs, dire headlines and dismal price action have depressed investor sentiment.
But when extreme fear gets priced into the market, it’s usually a buy signal.
Of course, we don’t know yet if the recent market low is the bottom. That will largely depend on whether this economic shock morphs into a stickier, structural problem.
One encouraging sign is a flurry of insider buying. C-suite executives only buy in the open market when they think their stock is undervalued and will go up. The ratio of companies with insider buying compared to insider selling was 1.75 for March, the highest level since March of 2009.
If you incorporate technical analysis into your decision-making, use trend exhaustion signals. They are the best tactical guide for a climate like this, where the greatest risk is getting whipsawed. Don’t get whipsawed.
One tool that is excellent at spotting potential trend inflections is called TD Combo. It’s popular with hedge funds and institutional investors. Early last week, there was a TD Combo 13 buy signal for the MSCI All Country World Index (ACWI).
Source: Bloomberg, DeMark Analytics
A key takeaway from the Ides of March was to expect the unexpected. Going forward, we should all try to heed that lesson.
For instance, I’m more bullish now than at the start of the year. But I’m also taking it one day at a time, keeping an open mind.
Originally published by Forbes. Reprinted with permission.
This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.