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August Commentary

What happened: ·         With August now behind us, we looked back on solid returns across all major global indexes. The leader was yet again the NASDAQ with an impressive 11% return for the month. In-line with rising equities, we also saw the 10 Year Treasury Yield increase to 0.69% from 0.53%.  While still historically low, it represented ~35% increase over the prior month. ·         We ended the month with most major indexes now out of the red for the 2020, with the NASDAQ up 33% YTD. However, we still see US Small cap, represented by the Russell 2000 index, down over 5% so far this year. This provided a stark picture between the economy at-large, compared to “big tech” and which sectors were hurt by the pandemic.  What we did: ·         Proxy managed equity-oriented clients with a participation in the market rally, but without our foot fully on the gas pedal.  We maintained a defensive position in BND and GOVT in our equity models as we remained patient for opportunity, and looked to protect investor capital in this uncertain world. ·         As a result of our steadfast approach, there were no changes to the Core models. While we did hold a more conservative posture, we maintained some global allocations but held overweight in US equities. What we are watching: ·         As the S&P 500 and NASDAQ continue to make all time highs, and while we understand there are few alternatives to the equity markets, with debt rates at historic lows; it can still be argued that traditional valuations have gone too far, too fast. ·         We continue to closely monitor advances in COVID-19 vaccinations, the growing social unrest and looming US presidential election, which has a global impact no doubt. ·         We remain poised to react quickly if the market does in fact correct again, while remaining consistent with our algorithmic approach in our Core models. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licensed.

July Commentary

What happened: July was another strong month for the equity market, extending this historic recovery from March lows.  Technology continued to be the driving force, with the NASDAQ reaching new all-time highs, and the S&P 500 breaking out of the red for 2020.  The Dow Jones Industrial Average recovered, but remained down over 8% YTD, given it is mostly tech-free.   With the broad market soaring, one would think COVID-19 is a thing of the past. However, COVID is still affecting us daily on many levels and will likely be doing so for the foreseeable future. Additionally, the significant stimulus of an extra $600 weekly added as part of unemployment benefits ended this month. This growing disconnect between the stock market and the real economy led many to believe a market reversal was not a matter of if, but when.  What we did: We held steady with most of our equity positions, overweighted in U.S. with continued exposure to Asian markets, which contributed to July’s performance.   The holdings in the Core Equity model with the most substantial changes were in the conservative sleeve, as we cycled out of TOTL into BND and GOVT. With the sale of VGK we removed the last of our direct exposure to Europe.  What we are watching: The S&P 500 has broken through the 3,200 handle-mark which had previously shown resistance on the technical side, and may now continue to bleed up heading toward the US presidential election. We are continuing to closely monitor the reopening of businesses and increase in COVID-19 cases which now seem to have little effect on this unprecedented recovery.  We remain poised to react quickly if the market does in fact correct again, while remaining consistent with the science in our Core Equity model.

Epidemics and Market Returns

Coronavirus is sweeping the globe.  With 2,500 confirmed deaths and over 80,000 reported cases across 34 countries (as of this writing), this illness has caused an international panic and market sell off.  Because I am not an epidemiologist, I won’t opine on whether this level of panic is warranted.   Nevertheless, what I can do is discuss how coronavirus might affect your portfolio.  Of course, we cannot know the future, but we can try to learn from the past. If we look at how markets performed during prior epidemics, what do we see? Yun Li at CNBC, recently wrote an article addressing this question, where she stated: Looking back 20 years, previous epidemics from SARS in 2003 to the Ebola scare six years ago shaved 6% to 13% off the S&P 500 over different lengths of time, according to Citi. Therefore, we should expect coronavirus to cause a market dip of 6% to 13%, right?  Not so fast.   After digging more into the article, it seemed like the Citi study cherry-picked the time periods of each epidemic to conveniently fit their narrative.  For example, they listed the end of the West Africa Ebola epidemic as February 2014, though the number of Ebola cases peaked 8 months later in October 2014: 

A History of Dead Cat Bounces

After falling more than 4% on Friday the 20th and nearly 3% on Monday the 23rd, the S&P 500 closed at a drawdown of almost 34% from all-time highs. Things were looking bleak for the market but then a funny thing happened — it finally started going up…in a hurry. A 9.4% gain on Tuesday was followed by a 1.2% increase on Wednesday and a 6.2% advance on Thursday, good enough for a 3-day surge of 17.6%. There was a chorus of market prognosticators who reminded us that stocks don’t tend to bottom on runs like this. In fact, this type of burst has all the makings of a dreaded dead cat bounce. The advance was blamed on a short-covering rally or algorithms or rebalancing or Joe Exotic’s heavenly mullet. No one really knows why stocks jumped so much so fast but the 3.4% decline last Friday and today’s sell off at the close should have you at least paying attention to the dead cat theory.  It’s quite possible this is a temporary relief rally within a broader bear market that isn’t over just yet. This type of move has precedent. Many of history’s great crashes have exhibited head-fake rallies that offered investors a false sense of hope that proved to be fleeting. During the Great Depression stock market crash there was a 47% rally from late-1929 until the early Spring of 1930. It didn’t last of course. Before that rally stocks had fallen 45%. After rising almost 50%, they would go on to fall by more than 80%. Ouch. That crash also included monthly gains of 8%, 9%, 12% and 14% before all was said and done along with rallies of 23%, 27% and 35%. I can’t imagine the amount of false hope each of these rallies must have given investors. Talk about a soul-crushing crash. The nasty 1973-1974 bear market that cut the market in half saw a 20% bounce before it was over. Even the 2007-2009 market crash gave us a gain of more than 25% that was eventually relinquished. The bear market from 2000-2002 saw three separate rallies of around 20% before finally settling in at a bottom more than 50% lower than the peak. On a spreadsheet, it often looks like market crashes are a straight line down but that’s typically not the case: The Great Depression is always the worst-case scenario but the dot-com crash may be second on that list. It included not only the bursting of the tech bubble but also the Enron scandal and 9/11. Even after bottoming in October of 2002 and quickly rising more than 20%, there was yet another 15% decline before finally taking off until 2007. There’s a good reason why it’s so difficult to tell the difference between a dead cat bounce within the context of a bear market and an actual market bottom. When stocks do eventually bottom, they tend to see strong gains coming out of the gate. Here are the 3 and 6-month returns from the bottom of past S&P 500 bear markets: I’m sure every one of these recoveries was called a dead cat bounce, bear market rally, short-covering or junk stock rally. It’s hard to trust the market to give you gains when all it’s done recently is take them away. The stock market can move hard and fast in both a dead cat bounce AND a bear market bottom. The true nature of these bounces will only be known in hindsight.  This crash has been so swift and severe that it will likely play by its own set of rules. The only trade we should be all 100% certain about at the moment is going long humility and short hubris.

2020 First Quarter Recap

What a difference a month makes. We began the quarter with a somewhat rosy global economy, with only distant issues happening on the other side of the world. China was having troubles since December with what was thought to be a pneumonia outbreak. Combined with the wild fires that overtook Australia. When a surreal wave of chaos and worry swept the globe, creating a historic event: a global health pandemic that quickly burst into a global lockdown, practically halting the world economy. How did Proxy react in this scenario? In the case of our global diversification model, Core Equity, whose stats are above, we stayed our course and let our indicators tell us when to divest. We closely watched the indicators during the initial drop (-13%) from the all-times highs made in February and the rebound the market made (+5%) up to March 4th. We exited all our core funds on March 11th with the overall market down 19%, and moved to safety in a fixed income exposure, in the form of the professionally managed TOTL fund. The market proceeded to drop a total of -34%. This was such a tricky market that even safe havens were getting caught in the chaotic volatility. However, we sheltered the brunt of the storm. Once the Fed announced a number of liquidity injection measures, we added exposure to government Treasuries. And now what? Foremost, we are not in this for the short run. We are again applying our long standing methodologies to add risk when it makes sense to do so. As we’ve commented in our last newsletters, these are not conditions to invest “normally”, we will proceed with a lot of caution since we have two major intertwined events going on at the same time, the imminent recession and a public health threat. We are closely monitoring the quarterly earnings results coming out early April to understand how deep will the economic impact be, while we apply our tactical and timing rules to our investment choices.

Monthly Commentary: April 2020

What happened: What we did: What is to come: Our article may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this publication.

Are We Back To Normal Yet?

From 1982 through September of 1987, the S&P 500 rose 236% or nearly 24% annually. The index was up more than 50% on a total return basis from the start of 1987 through the end of September of the same year. You know what happened next. The biggest one day crash in history saw stocks fall more than 20% in a single day. Many people at the time worried the crash would lead to depression. We don’t blame them. Yet on a long-term chart the 1987 crash looks like a minor bump in the road: The S&P 500 managed to finish the year up more than 5%. From October 1987 through the end of 1999, the stock market would rise an additional 533% or 16.3% on an annualized basis. Investors are often fond of using past market environments to compare to the current state of affairs, typically referencing those comparisons with, “history doesn’t repeat but it often rhymes.” From March 2009 through January of 2020, the S&P 500 was up more than 450% or 16.9% annually. Then the Coronavirus hit and stocks got slaughtered. But look at how quickly they’ve come back: When we looked at the crash and subsequent rally last week we thought: Why couldn’t this be a 1987 moment where we see an awful crash followed by a resumption of the bull market? Our next thought was this:  What are we doing? Nothing about this environment is like the 1980s. They may have thought they were going into a depression back then but we actually did this time (and still stock market is still rallying). One of the reasons history doesn’t repeat or rhyme is because there is always stuff happening that has never happened before. Just look at what’s transpired in the markets this year. It took just 22 trading days for the S&P 500 to fall 30%, the fastest 30% decline ever from an all-time high. Oil prices went negative. Corporate bonds fell 22% before the Fed stepped in with their bazooka. Not only that but even treasuries sold off in mid-March as investors made a mad dash for cash: Some of the biggest bond ETFs even traded at a discount for a few days during the massive selling of risk assets. We’ve gone from the Great Depression to the 1990s in the span of two months. There have now been 25 (and counting) daily move of 3% or more for the S&P 500. March was the most volatile month ever in the stock market. Something investors like to remind you of during bear markets is how “The stock market never bottoms on big up days.” This makes sense when you consider big up days and big down days tend to cluster around one another during market downtrends. Volatility typically goes haywire in both directions when stocks are falling because investors panic sell and buy. As of the close on March 23rd the S&P 500 had fallen 34% peak-to-trough. The very next day stocks were up 9.4%. The previous month had seen daily gains of 6%, 9%, 5%, 4% and 5% so you could excuse investors for not believing that huge one-day bounce was going to be the bottom. Guess what? That enormous 9.4% bounce was THE bottom (so far). The same thing happened in late-2018. On Christmas Eve that year the S&P 500 was up 5% after falling close to 20%. That 5% up day proved to be the bottom. Stuff that “never” happens in the markets seems to happen all the time now. We figured the fall of 2008 was going to be the craziest market environment of our lifetime. The last 3 or 4 months has surpassed that and then some. Make no mistake — this is a one-of-a-kind market and anyone who tells you they know what’s coming next is nuts. Our article may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this publication.

Monthly Commentary: May 2020

What happened: What we did: What we are watching: Our article may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this publication.

2020 Second Quarter Recap

How did Proxy react in this scenario: What we are monitoring for the near future: Our article may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this publication. Proxy Financial is a registered investment adviser. Proxy and its Financial Advisors are not licensed in all states to offer securities and insurance products. This site is not a solicitation of interest in any of these products or service in any state which the registered representative is not properly licensed.

The Old “New” Normal

We received the following comment recently: About mid-to-late 2019 I said screw it and put most of my portfolio into Facebook, Apple and Microsoft and have done really well. Why shouldn’t I put every penny into these stocks (along with Amazon, Netflix and Google) and just wait for other businesses to get closer to them? I can’t help but be curious about names like SHOP (Shopify) and SPOT (Spotify) and eventually the Airbnb IPO. But there’s still a huge part of me that says the FANMAG is it. Change my mind.   I get the sentiment here. It’s hard to ignore how wonderful both the businesses and stocks of companies like Facebook, Amazon, Netflix, Microsoft, Apple and Google have performed. Look at how well these stocks have done over the past 10 years in comparison to the S&P 500: These numbers are amazing. And with the kind of growth you get from these companies, investors are willing to pay a premium: This is a situation where we have: – Businesses everyone knows, and at a basic level, understands. – Companies that are growing like crazy. – Stock prices that have outperformed the broader market for an extended period of time. – Companies that have essentially turned into one decision stocks (and that decision is to buy and hold them because they simply keep growing). This is not the first time investors have become enamored with name-brand growth stocks. There was a nasty bear market from 1968-1970 which saw the S&P 500 fall 36% but smaller and value stocks get hit even harder. So investors came out of that downturn more enamored with bigger, growth-oriented companies. These blue chip stocks with high growth characteristics became known as the Nifty Fifty and included the likes of Polaroid, Xerox, McDonald’s, Coca-Cola, IBM and JC Penney. The average price-to-earnings of the Nifty Fifty was 42x, more than double the 19x P/E ratio for the S&P 500 at large. More than 20% of these companies had P/E ratios in excess of 50x earnings by the end of 1972. What happened next to these “one decision” stocks is a tale as old at time. They got too far ahead of themselves and crashed even harder than the market at large during the bear market of 1973-1974. Here are the drawdowns for a handful of these names: Polaroid dropped more than 90%. Avon was down more than 85%. But the tale as old as time here didn’t end following the bear market. The people who always say “This is going to end badly” fail to realize markets keep chugging along. And unless they go out of business or get acquired, so do companies and their stocks. Although the Nifty Fifty stocks got crushed after being bid up so much by investors in the early-1970s, their long-term results were still pretty good. Jeremy Siegel published Revisiting The Nifty Fifty in 1998. He published the annual returns from 1972 through the summer of 1998 for these stocks along with their 1972 P/E ratios and subsequent earnings growth rates: Many of the stocks at the top of the list showed extraordinary performance. Some of these stocks were terrible investments. But you can see over this multi-decade period, this group actually more or less kept up with the overall stock market. Despite crashing from lofty levels, over the long-term the Nifty Fifty did just fine. You could make the case many of the tech stocks that are now one decision names could have a similar experience in the years ahead. A large drawdown in these stocks at some point is almost inevitable. High returns don’t come without high risks. Just look at the historical drawdowns in the FANMAG stocks over time: Amazon fell almost 95% following the dot-com bubble. Apple has seen multiple 60%+ crashes. Microsoft was underwater for more than a decade. Even Netflix was down more than 80% over the last decade. Why does this happen? Who knows. Siegel posits it’s probably just a loss of confidence: The first is that a mania did sweep these stocks, sending them to levels that were totally unjustified on the basis of prospective earnings. The second explanation is that, on the whole, the Nifty Fifty were in fact properly valued at the peak, but a loss of confidence by investors sent them to dramatically undervalued levels. Siegel’s other fascinating discovery (see the warranted P/E ratio in the table above) was how some of these stocks with abnormally high valuations in the 1970s were actually undervalued: What is so surprising is that many of these stocks were worth far more than even the lofty heights that investors bid them. Investors should have paid 68.5 times the 1972 earnings for Philip Morris instead of the 24 they did pay, undervaluing the stock by almost 3-to-1. Coca-Cola was worth over 82 times its earnings, and Merck should have sported a multiple of more than 76. Interestingly, the group that was the most undervalued, and subsequently most successful, catered to brand-name consumer foods, including McDonald’s, PepsiCo, Coca-Cola, and even Philip Morris. IBM, which commanded a price-earnings ratio of 35 in the early 1970s, was actually worth only 17.1 times earnings despite its recent stellar comeback. And while investors paid 45.8 times earnings for Xerox, it was worth only 19.4 times earnings on the basis of its future growth. Polaroid sported the highest price-earnings ratio, selling for a fantastic 94.8 times earnings, almost eight times higher than was justified by its future returns. Who would have thought in the 1970s that a soft drink manufacturer would so thoroughly trounce technology giants such as IBM, Digital Equipment, Texas Instruments, Xerox, and Burroughs? The other side of the one decision nature of these stocks comes from those who point out the growing concentration of these companies at the top of the stock market. The biggest 5 stocks (Microsoft, Apple, Amazon, Google and Facebook) now make up more than 17% of the entire U.S. stock market. Granted, this is