Our long term clients (some, for more than 25 years) know that I am an “optimistic realist.”  I suspect that over the years, I’ve evolved a bit less along the “optimistic” side to be a bit more “realistic” but that is, I suspect, the long term developmental process for most optimists.

As you know, we haven’t “cut and run” from this market but we have, over the past several years, been building up layers of diversification in stocks, to a lesser extent, bonds, in cash and in principal protected investments.  We’ve evolved our technology to include mathematical, algorithmic risk measurement and we’re now in the process of improving our trading platform which improves our overall firm efficiency.  In short, we believe that there is a future and that future is bright.  We are “half-full” folks, rather than “half-empty.”

Despite today’s very healthy advance in the markets, we believe that the next several weeks will again test investor’s resolve so we’re not chasing stocks this morning.  I’ve spent a fair amount of time in this state of “self-isolation” over the past month looking at all of the plausible scenarios for our current situation and I think that Tom Lee of Fundstrat has summed it up best with the visual, below:

 

 

Fear is beginning to subside, but we are about to be bombarded with higher unemployment figures, with disastrous economic numbers, and with the continuation of the negative news cycle relating to Covid-19 deaths.  We think that it is possible that we could retest the market lows of late March so we’re not buying the updrafts but are waiting for the downdrafts in which to improve portfolio efficiency.

We think that the world’s 2020 Shutdown is beginning to get a leg up on Covid-19.  New daily case growth in the U.S. is beginning to flatten, moving from a geometric/exponential growth rate to a linear growth rate.  This is like the original Chinese experience as well as the experience in Japan and Taiwan and in western Europe.  This provides fuel for further stock market gains, at least in the present.

If we analyze the U.S. GDP by state, 18 states represent 75% of U.S. GDP.  8 of those states represent 50% GDP.  Those are California, Texas, New York, Florida, Illinois, Pennsylvania, Ohio and New Jersey.  With the exception of New Jersey and Michigan, most states in the top 18 have done better than New York.  If market bottoms have coincided generally with Covid-19 case number peaks, it may well be that the market “bottom” for this event was established two weeks ago.  According to Tom Lee of Fundstrat, the market usually bottoms before unemployment numbers peak.  It would make sense that unemployment has not yet peaked, with some “hold out” states still not having imposed Stay at Home mandates.  If Lee’s thesis is correct, we may have another test of that bottom, though today’s broad-based rally was encouraging and definitely chased a lot of the short sellers out of the market.

If the contagion curve continues to flatten and therapeutic treatments show greater efficacy, then we believe that the bottom was put in and markets may not retest the lows.  That, however, will be determined over the next few days, in our view.

We’re just beginning to record the effects of this economic shutdown and gain an understanding of how our cultural behaviors may be changing and how that will impact our country’s and other countries’ businesses. I believe that we will be sorting this out for many years to come, as we did following the Great Recession in 2008.

I believe that the current markets have become stock pickers’ markets which bode well for the use of factor investing if one invests portfolios using exchange traded funds or with individual stocks and bonds, or a combination of both.

When we look at the classic industry sectors, we think that careful selection of sub-industry groups will provide portfolio alpha.  Specifically, we think that consumer discretionary stocks in the auto parts, restaurants and luxury goods area should outperform.  In technology, we think that the semiconductors, application software and tech hardware will outperform electronic equipment and tech distributors. Communication services (formerly “Telecom”) should be centered on interactive home entertainment, movies, and other media, rather than traditional services like wireless and advertising.  In financials, we like the investment banks and regional banks, as opposed to insurers. In healthcare, we favor pharma and managed care versus healthcare technology and equipment.

In fixed income, we are looking for higher yields and lower risk.  We can find those with the insurance companies in the form of fixed and indexed annuity structures.  One provider, for example, is still offering an accumulation rate of 7%.  We’re not sure for how long, but we think that this is an excellent vehicle for the longer term investor.

If you have any questions, please feel free to call me at 561-207-6399.

 

Best

Curt Lyman