Some ideas are fleeting and go in one AirPod and out the other. Others just seem to stick for some reason and you’re constantly coming back to them over and over. Paul Graham wrote such an idea in 2014 about how to be an expert in a changing world and it’s stuck with me ever since: If the world were static, we could have monotonically increasing confidence in our beliefs. The more (and more varied) experience a belief survived, the less likely it would be false. Most people implicitly believe something like this about their opinions. And they’re justified in doing so with opinions about things that don’t change much, like human nature. But you can’t trust your opinions in the same way about things that change, which could include practically everything else. When experts are wrong, it’s often because they’re experts on an earlier version of the world. The world of finance is littered with people who are experts on an earlier version of the world. They rely exclusively on specific backtests, formulas and strategies that would have worked wonderfully in the past. Now, I’m not saying we can’t use history to help guide our actions in the markets but so many investors get stuck in the mindset of fighting the last war that they fail to realize things have changed to such a degree that the old playbook needs to be thrown out the window. There are a handful of investment principles that are evergreen but the market structure is constantly in a state of flux. Companies, the market environment, sectors and the macroeconomy are never static so investing like they are can be problematic. A handful of fund managers were lauded for calling the financial crisis of 2008 but they all but missed the subsequent recovery and bull market because they became fixated on a crisis mindset. In fact, the star fund manager is either extinct since 2008 or in deep hibernation. One of the reasons this is the case is because so many professional investors were using a pre-2008 playbook. They assumed the Fed was going to cause massive inflation or a bubble from low interest rates.Interest rates had never been so low for so long and investors were adhering to strategies that worked in the 1980s or 1990s but weren’t useful anymore. We could be setting up for a similar paradigm shift following the events of 2020. In the future it’s possible we look back at the pandemic as a turning point in the use of government spending as a tool to counteract economic contractions. This year we may have experienced the birth of a new fiscal policy regime. Politicians on both sides of the aisle are increasingly coming to realize that fiscal policy is the “cheat code” of economics. If you’re willing to tolerate inflation risk, you can use it to achieve any nominal outcome that you want. As people become more aware of this fact, they’re going to increasingly challenge traditional approaches, demanding that fiscal policy be used to safeguard expansions and eliminate downturns. Upside-down markets will then become the norm. One of the most confusing aspects of the 2020 market environment to many investors is how such an awful economic backdrop could lead to such strong equity markets. Here is a simple illustration that hopefully will help explain: The basic idea here is with enough fiscal and monetary firepower, even the worst of economic environments can actually lead to higher prices in financial assets because investors know corporations have a backstop. And that’s exactly what’s transpired this year.The government and the Fed stopped a depression by throwing gobs of money at it and investors looked across the valley because they knew it would be short-lived.This strategy does come with its risks, inflation being the biggest one: Inflation is not something we’ve had to worry about for some time now, so the downside risks from this new world could be significant. Risk is funny like that. Take one off the table and another magically appears. No one can be sure if 2020 was a fiscal fork in the road. It depends on what the political will for this type of spending will look like. I can’t imagine politicians who wouldn’t pull these levers in the future after witnessing their power but I’ve given up trying to figure out why politicians don’t use more common sense so you never know. Understanding this potential shift doesn’t make it any easier to predict the future because investor reactions to market dynamics are not static either. However, I do know for certain that if you’re an expert on an earlier version of the world, you will likely continue to struggle in this ever-changing investment landscape. We all need to be open-minded in the coming years. 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.
What happened: · October saw continued volatility in the equity markets. The month leading up to the US Presidential elections looked as if global indexes might recover from September and approach previous All time highs, but retreated ending the month mostly flat. This mid month retread in the equity market can most simply be explained by the uncertainty surrounding the election as well as COVID-19 cases continuing to raise. All this also lead US fund flows to move out of equities towards the safety of bonds. · Even with Septembers sell off and October remaining mostly flat, Tech is still having a remarkable 2020, with the NASDAQ up over 22% YTD. However, there is a different story to be told for the DOW Industrial Index and US small cap Companies, represented by the Russell 2000 index, both down nearly 6% at the end of October. This continues to show 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, by holding steady in our allocation over the month with no changes to our Core Equity model. We maintained our model exospore to US equities utilizing IVV and QQQ, but have also kept some fixed income exposure via BND. The algorithm predicted little change through out the month and was spot on. · The Proxy Core Growth model held up well in the recently volatility, which offered the opportunity to add a few new positions. The strategy, while still heavy in high growth tech, did largely benefit from a few select names in the healthcare and consumer cycle sectors. What we are watching: · The US elections seems to be the sole focus both domestically and globally. With this very heated election coming to an end as the polls close November 6th, we wait to see if Dem. Joe Biden can hold his lead in the polls or in President Trump we remain on for another 4 years. With such a close race and President Trump already vocalizing concerns over voter fraud via mail in ballets, there is a chance this may drag on for months to come. Such a situation could be have a significant drag on economic recovery and the release of addition COVID relief funds. · We continue to closely monitor advances in COVID-19 vaccinations, as the winter months approach and cases continue to raise. · 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. 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.
How did Proxy react in this scenario What we are monitoring for the near future:
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.
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.
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:
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.
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.
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.
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.