Navigating Through Historical Levels of Uncertainty
In what was an incredibly tragic quarter in global history, it’s impossible to quantify the cost of the medical crisis. We have, however, been doing our best to keep clients fully informed about economic events arising during this time, along with our strategic approaches during each development. I hope these commentaries have been helpful in this time of global uncertainty.
At the end of February, before havoc was unleashed, I shared some information on how we manage our tactical portfolios during volatility and downturns, which included a fact sheet on our Cash Scaling Strategy. Central to how we manage these portfolios is discerning whether a downturn is a correction or the start of a bear market, and ensuring decisions are made using data from diverse and complementary factors. This strategy would turn out to be critical in managing the economic events to come from the oncoming pandemic crisis.
In early March, just before the markets went into free-fall I shared Fear is Contagious, providing additional context for our tactical strategy management. At the time, broken long-term technical indicators were offset by improving valuation indicators, and our portfolios remained 20-25% in cash. We had our eye on the ongoing news flow, anticipating a surge in cases would cause further deterioration of the markets.
As the market turmoil began, I provided some detail on the evolving Fixed Income ETF Dislocation caused by fear-generated selling, and the significant discounts seen by sellers trying to unload ETF positions during that time. In that period, our Tactical Income strategy was trading at 3% below NAV, and we anticipated the discounts to properly revert back to NAV within 11-14 days. As predicted, those discounts have since righted themselves and the market is once again aligned.
On March 16, as the true extent of the medical crisis raged on I shared a letter about the unsettled ground we found ourselves sharing, along with the basic tenets that NorthCoast operates under during these times. Technical indicators were still negative with positive valuations. Our biggest takeaway during this time period was the futility of selling and rotating into new stocks given +/- 25% intra-day moves and the mismatch problems that would cause. We remained 25% in cash and bonds in our tactical strategies, and looked forward to the upcoming Federal stimulus measures.
Despite the stimulus announcements, we started settling in for what we recognized could be a long haul. NorthCoast uses 30+ years of experience through several significant downturns, along with sophisticated data research, to manage through uncertain market conditions like these. We recognized the three facets of this crisis as the medical tragedy, the economic effects and liquidity issues – the path of the former being unknown and the two latter being buoyed by Fed action early and often. Our models continued to be optimistic, despite extreme levels of fear and valuation. Our recommendations remained to hit pause on any aggressive actions pending some sense of market stability.
By March 30, conditions became a bit clearer, and I shared my thoughts on the dichotomy between my right-brain/left-brain thinking during this time. The speed at which milestones have occurred during this downturn mark this as a singularly unique circumstance, and in the span of a week the market panic of seven days prior became a memory. We warned however, of ongoing volatility until new virus cases declined despite capital market improvements brought on by government action.
Most recently, I shared my thoughts on portfolio spring cleaning, while we wait for the rolling peaks of the pandemic to move through the country. Though we could not rule out further declines, we have seen some evidence of the beginning of a market bottoming out process.
As I’m writing this, the S&P 500 just closed out its best week since 1974, after the Fed stunned markets into action with an additional $2.3 trillion of aid to small and mid-sized businesses and sweeping measures to support the U.S. municipal bond market. There is general consensus that the government will provide as much capital as is necessary to shore up both Main Street and Wall Street, with a lifeline for any sector in existential crisis. We continue to believe that while there are opportunities in this market, aggressive moves should be tabled until volatility has declined.
That is a lot of commentary from me for one quarter. My hope is that these pieces along with speaking to our advisors help provide you with support, context and depth in your investment matters. This has been a quarter in which going it alone has been truly grinding. Never in my lifetime has it been so easy for investors to make terrible decisions as daily emotional shifts took hold. The stories coming in about margin calls, MLPs, and panic selling are so unsettling due to their lifetime impact. We have outstanding advisors – please use them. They work for you, and only in a fiduciary capacity.
In conclusion, I’d like to share a new strategy idea we’ve been working on for the last year. We have a long history of researching new strategies to help our clients regardless of market conditions, and for clients looking for new entry points in this market, I really like this portfolio. We are now rolling out our new Defined Outcome SMAs. These two strategies provide defined exposure to the S&P 500 for the next twelve months. For example, you can own the S&P 500 index for the next 12 months and be capped at a 20% gain and simultaneously protect yourself from -10% of a decline by using options contracts. It really helps to add certainty during an uncertain time.
Thank you for your trust. I hope you’ve found our ongoing market commentary useful within these challenging times. We continue to be available to discuss your account and strategies at any time. Do not hesitate to contact us.
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The information contained herein has been prepared by NorthCoast Asset Management LLC (“NorthCoast”) on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information, and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose and it should not be used as a basis for investment decisions. © 2020 NorthCoast Asset Management LLC.
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