Having Buy Discipline in the Eye of the Storm
I hope this finds you and your family safe and healthy. This month I would like to continue in our discussions of the importance of your advisor having both a buy and sell discipline. The last article I wrote detailed our firm’s math and rules based “Sell Discipline” and why we made the decision to move all our client’s assets to cash and stable value funds. Some of you may have seen last month’s rally and wondered if we have moved our positions back to the market. The answer is unequivocally: no. Rather I compare the current situation to being in the eye of the hurricane. After experiencing the devastation of a hurricane’s initial impact, it is easy to let your guard down as the winds subside and rain lets up. You may want to leave the safety of your shelter and venture outside. However, if you know the calm is merely temporary and danger is still close you will probably want to seek safety until the storm has truly passed.
April’s rally was not unprecedented. In fact, history has shown us that often after a significant downturn, the market will frequently have upticks before falling again. While we can’t know for certain what pattern this current market will follow, we do have our two guiding principles: history and math. In January 2009 saw the market up over 24% off the bottom before later setting a new low. Also, the head fakes during the 1987 crash, Dot-Com Bubble, and Great Recession took an average of 89 days, meaning that it took an average of nearly three months before setting new lows. The government’s significant financial intervention was a huge factor in helping to subdue the markets. The government’s quick response was unlike any other we have seen in past market crashes, and it certainly went a long way to reassure investors. However, it may not be permanent fix to an already fragile situation. Regarding the math we use, our recession indicators did not fall for the head fakes during the previous two corrections. Our program did not reverse positive until the long- term positive trends were confirmed. Even with April’s strong performance, our long-term indicators remain negative, meaning that we will remain on the sidelines for now.
It is also important to have a grasp on what is happening within all areas of the market, not just one or two indexes (like the S&P500 or Dow Jones Index). Most investors are diversified in a broad number of asset classes. Our program looks at all asset classes and sectors and then ranks them from strongest potential to weakest. Up until early March 2020, domestic equities had been the strongest area without a close second since 2009. We have not had any international or emerging market exposure for over 2 years. Currently, our program has Cash being the number one area with fixed income being second. Domestic equities are current ranked third and are close to being surpassed by currencies. As such, we remain invested in cash positions.
Another area that should be considered are the underlying fundamentals of the market. We do believe that the coming information regarding corporate earnings, unemployment, and GDP will likely be dismal for the foreseeable future. A recession looks extremely likely as it seems the damage created in the second quarter will have lasting impacts on both large and small corporations, even after the US economy can fully open. When we will be able to truly open remains another uncertainty as it is expected that we will continue to see spikes in COVID-19 activity until we have achieved a significant level of herd immunity or there is a viable vaccine. Experts say both options are still a long way away.
What do we do? We continue to monitor our math and rules-based program and wait in safety until the facts show that the storm has truly passed. The volatility we are experiencing on a weekly (and sometimes even daily) basis is something even the most seasoned advisors have not experienced before. In short, we still stand by the belief that the risk continues to outweigh reward potential. It is possible that we will not retest the market lows we saw in in March. Our long-term indicators will begin to move positive when the biggest risks are behind us. No one has a crystal ball, but if we are to error, we choose safety for our clients. As our indicators begin to turn positive again (and we know that they will), we will begin our transition back to holding equity positions. The process will be thoughtful and methodical as we will use our program to buy areas of the market showing the strongest momentum and will continue to avoid the weakest ones. This approach has allowed our models to outperform the S & P 500 index while still seeking to preserve our client’s principal. We look forward to finally seeing this financial storm pass us by and the sunny skies that will ultimately prevail. Our country is comprised of strong and resilient people and we know that in time “this storm shall pass”. If you have any questions about our methodology or if you should consider making any updates to your current holdings, we would love the opportunity to speak with you.
Ashley Rosser, President
Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.
Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.