We thought it would be wise to send a specific market update addressing a few common questions we’ve received and providing an update on our portfolio positioning. Please do not hesitate to reach out via phone or email if you have questions about the current market environment.
One of the most challenging things to do right now for all investors is to avoid making changes in the portfolio simply for the sake of “doing something”. Having the ability to adjust portfolio risk is a cornerstone of our investment process. While most clients have not seen any major changes in the last 2-3 weeks, this is primarily because our portfolios were already positioned well for this correction. This is important to understand in light of the media hysteria. First, understand that the long-term trend for growth in stocks is still intact as shown by the indicators below. Second, we have been extremely selective in the asset class selection in clients’ portfolios. The most affected areas of the market during this rout are the asset classes we have been avoiding for the past two quarters.
We began the year with a cautious approach due to the extreme rise in the markets over the 4th quarter of 2019. Our portfolio risk level was significantly lower than the overall market (measured in standard deviation as well as beta). Most clients were positioned with at least 8-15% in cash (money market funds) depending on your personal risk tolerance.
As you may have noticed in our weekly sitrep emails, the market indicators we follow were consistently green until the end of January when the short-term indicator changed to a cautionary state. The short-term indicator is most helpful when placing new allocations of cash into the markets. That indicator returned to a positive status on March 2nd. The long-term indicator has been interesting to watch since it has not fallen significantly from its February highs. We believe that reinforces our view that this is a market correction rather than a new bear market or economic recession.
However, this has been a very challenging market correction. The outright volatility in markets over the last three weeks is difficult to understand. There are not many precedents for this kind of prolonged volatility and many of the analysts we follow have found that traditional models have not been reliable.
Source: Saut Strategy, Andrew Adams, 3/12/20
Market selloffs normally occur over 17-25 sessions and today (March 12th) is session 16. We have not seen a need to change any of the equity positions in our client portfolios due to the positioning we made before this began. We believe there the opportunity for a significant move higher in stock prices when this correction is over, and we will likely look to make a few adjustments to take advantage of that move.
WHERE WE’VE SEEN HIGHER RISK
International stocks, international bonds, small company stocks and junk bonds
Our market research revealed elevated risk in international stocks and bonds. We had moved client portfolios to have very little to no exposure in those areas. Our research also suggested that small company stocks in the U.S. were suffering from weak demand from investors. We had also eliminated most of those holdings where possible. The resulting portfolio was concentrated in large, high quality U.S. stocks primarily from the growth side of the market.
We’ve also witnessed rising risk in lower quality corporate bonds (junk bonds). While we have not held any positions in specific junk bond funds for several years, we did a thorough analysis of our other bond funds to determine where low quality issues could affect a portfolio. As a result, we removed the Loomis Sayles Floating Rate Fund (LSFYX) on February 11th from all client portfolios. We invested the proceeds of that transaction into a higher quality bond fund.
According to Morningstar.com as of March 11th (most recent available):
S&P 500 Price Index -15.15%
Dow Jones Ind -17.47%
We do not publish Engrave portfolio returns since each client has unique needs due to their individual risk tolerance. However, in looking at a few specific client accounts in our various risk models, we believe that our risk management strategy is effective during this time. We are always happy to review individual situations and adjust where needed.
If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to email@example.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.
Engrave Wealth Partners Investment Committee
Bill Day, CFP®, CIMA
Taylor Parker, CFP®