Are you hearing this line over and over again as friends and associates get together and have the chance to talk? I sure am.
And I have to agree. It’s crazy when schools are closed and it’s not vacation time. It’s crazy when you want to go to a restaurant and only carry-out service is available. It’s crazy when you try to visit your mom at her assisted living residence and no visitors—including family—are allowed. It’s crazy when you need a test report from a hospital and you have to meet a hospital worker at the door because the facility is closed to all but existing and prospective patients.
It’s crazy when you have to cancel an Easter vacation. It’s crazier still when you pick up the phone to start canceling your summer travels too. (And, of course, you’re wondering, “What about the fall travel plans?”)
And it’s crazy when the office is half-empty or you’re stuck working from home. As I notified our clients and financial associate partners yesterday:
The landscape seemed almost surreal today with empty desks and light traffic on what are normally very busy thoroughfares. There was no sports talk on the TV or radio, no scores or standings or speculation about championships. All of the talk and news programming seemed to revolve around the virus and, of course, the stock market …
Isn’t it crazy? Stocks experienced their worst-ever loss on a point basis—and the most on a percentage basis since 1987. While not 1987’s 25% loss—it was “only” half that!
The Federal Reserve is doing its part. It lowered interest rates on Monday of last week and then lowered them by another 100 basis point (1 percentage point) on, of all days, Sunday. While I disagree with the timing of both of the Fed’s moves, in that they seemed to add to an air of panic, the rate reduction and the return to quantitative-easing (QE3?) bond purchases should add a great deal of liquidity to the financial system.
Yet the rate reduction made zero-percent interest rates possible! Isn’t that crazy?
Normally, such a move would have sent stocks roaring higher. But when things are crazy, they are not “normal” by definition.
I heard a comment from a market technician, which I will paraphrase here: “It is either a normal time and the market will immediately bounce higher, or it is a once-in-a-generation time and the markets will go much lower.”
Just as I said last week, all of the historical patterns suggest a bounce here. We did get that bounce last week, and, after today (March 16), we are right back in the same position again. But the jury is still out on whether the market will resume a decline to still lower levels. We tumble, then we rally, only to tumble again, as we take, lose, and retake the same ground like in World War I trench warfare.
We do have some positive political seasonality days working in our favor this week. Additionally, sentiment is at near-record negativity, usually a contrarian signal suggesting a rally. Rumors abound that some of Wall Street’s shrewdest investors are nibbling at value plays.
Fortunately, the U.S. economy enters this turmoil at an all-time high and has been outperforming everyone else. We are in a solid position to withstand the economic hit dealt by this virus. We will be able to return to economic good times after the pig-in-python virus spike passes through the economy.
But as Americans, we have to be able to deal with what comes first. And what comes first will be more bad news before it turns better.
The steps being taken to flatten the infection curve are bringing much of the economy to a standstill. Many firms will not be able to do what we here at FPI are able to do and simply work from home and suspend travel.
Much of America depends upon going to work at a place of business that makes things or serves customers that normally come to them. When that does not happen due to the lockdown steps being taken in many states (like here in Michigan), it will likely mean awful economic and earnings reports over the next month or so, and there is no telling how the market may take them.
Investors could take the reports badly and stocks could fall further, or the bad news could be baked into the market by the declines already experienced. On the other hand, continued action by the administration, the Fed, and Congress could recharge the economy, as could news of new virus treatments or a vaccine (for terrific, easy-to-understand reporting on the coronavirus, check out www.MedCram.com).
FPI strategy update
Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure still shows that we are in a Normal economic environment (meaning a positive inflation rate and positive GDP). Our Volatility composite (gold, bond, and stock market) is showing a High and Rising reading, which favors stocks and then gold over bonds. Although all have positive returns in this regime stage, this is the riskiest Volatility regime for stocks and bonds and the second riskiest for gold.
FPI strategies, used in managing its subadvised funds, continue to outperform the indexes this year, as is also the case for almost all of our separately managed account strategies. All of the strategies have remained defensive with one exception. While our Self-adjusting Trend Following strategy has 80% exposure, our Volatility Adjusted NASDAQ strategy has -40% exposure (it’s invested in an inverse fund that makes money when the market falls) and our QFC S&P Pattern Recognition strategy has 0% exposure. Classic moved back into stocks on Friday’s (March 12) close.
The Classic signal comes after sitting out one of the most volatile weeks of all time. But now a mean-reversion, contrarian-based trade has been generated. While these signals have been very profitable in the past, it certainly has not started well. Regular Classic moved into S&P 500–like funds. QFC Classic invested into two of our Quantified Funds, which are more defensively positioned (about 50% exposure).
Obviously, moving into the market now is difficult. As I have investments of my own in Classic (and virtually everything else we offer), I understand the nervousness generated from such a move. Yet the Classic signals have been tested and followed over long time periods.
Reviewing the strategy returns through the close on Monday, March 16, I find that after maximum fees almost every one of our strategies has outperformed the S&P over the last 10 days of market volatility. It’s the same story with respect to performance since the February market top and also year to date. Many of our income strategies continue to show profits over all of these periods. And, over the last 12 months, scores of strategies remain positive.
Dynamic risk management is alive and well!
Yes, it is crazy. Things are not normal. Yet just as hope is not a strategy, panicking does not work as a strategy either. In the long run, as FDR so eloquently and eternally offered: “We have nothing to fear but fear itself.”
The world will return to “normal” and so will the financial markets. We just have to give it time and patience and quarantine the fear along with everything else. In the meantime, rest assured that Flexible Plan will continue to provide dynamic risk (and opportunity) management for your investment portfolios.
All the best, and may you and your family be safe and healthy (and don’t forget to wash your hands)!
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Inherent in any investment is the potential for loss as well as profit. A list of all recommendations made within the immediately preceding twelve months is available upon written request. Please read Flexible Plan Investments’ Brochure Form ADV Part 2A carefully before investing. View full disclosures.