For years we have discussed, written about, and educated on our rules-based investment philosophy. So, what does this look like in a market that has quite frankly gone haywire?
Do you remember the movie “The Hunt for Red October?” Sean Connery is a Russian submarine captain defecting to the US during the cold war. I’m sure you do. There is a great scene in the movie where the Russian navy is chasing this defecting sub, a torpedo has been fired, and their map is showing the end of their road. The ocean floor is looming, they are a boat length out of position, “CAPTAIN!” a crew member cries. Connery calmly counts, measures, and at the exact right moment commands “RIGHT FULL RUDDER, REVERSE STARBOARD ENGINE!”
How does a sea Captain possibly do this? Well, he’s as cool as the other side of the pillow, but he also has a foundational philosophy and a set of rules to measure data that allow him to make the best possible decision. One second longer and they will crash into the wall, or one second sooner and the torpedo will hit them. He has to get it right. In this case, the rules of engagement have broken down around him.
Now, let’s talk about real life. “The Hunt for Red October” is fiction and none of us are anywhere near as cool as Sean Connery. But our foundational philosophy of letting the data direct our decision making, and our pre-planned rules have served us well during this time. The markets have fallen at an unprecedented speed, very similar to October 2008, though without the warning of the previous 12 months as happened at that time. In this current market, within a week our rules took us risk-off. We believe this was a good move and one we should all be pleased with. However, headlines like Global Pandemic, Oil Price War, and the Disney’s Magic Kingdom closing start flying around, and we felt a boat length out of position with a torpedo chasing us. We want to move more conservative in our models and get to a position where we believe our clients can be successful. Our team has played the role of Captain. Each day our OCIO Clint Sorenson gives us a market floor and ceiling in which to make trades. For example, at the writing of this article, we believe the S&P floor is approximately 2400 and the ceiling is 2700. (This is a massive range subject to constant change so please do not take any action based on this example.) This frames our decision of trading now or later by giving us a risk/reward range. We can then look at charts from history to research how certain assets classes did in past volatile timeframes. For example, we can see that in general bonds outperformed stocks in October 2008 – March 2009. We can now build models based on this data. Our COO Joel Holden then leads the operations team in the difficult task of making these trades in a very abnormal market. Again rules, ranges, and timing all play a part.
We don’t pull this off as easy as Connery makes it look. And unlike a movie, this will not be over in a few hours. We believe it will take months for the Coronavirus, the markets, and the economy to work itself out, but all along, we will be measuring data, making decisions, and executing those decisions all with our clients’ best interest at heart.
Thank you for your trust in us!
In this week’s recap: Coronavirus continues to drive the markets, even as bankers and health professionals take decisive steps to stem the tide.
THE WEEK ON WALL STREET
The stock market suffered through another volatile week as it wrestled with the health and economic fallout of the domestic spread of the coronavirus. Swift and decisive actions by the Federal Reserve and policy responses from the federal government did not keep stocks from recording losses for the week.
The Dow Jones Industrial Average slumped 17.3%, while the Standard & Poor 500 lost 14.98%. The Nasdaq Composite index declined 12.64% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, fell 6.64%.1-3
Stocks Slide Further
The stock market continued its retreat amid fears of a darkening economic impact from the coronavirus pandemic. Despite a Sunday night announcement by the Federal Reserve that it was cutting its benchmark interest rate by 100 basis points to nearly zero and taking steps to increase market liquidity, stocks opened the week sharply lower, setting the stage for another difficult week for investors.4
Progress was reported on coronavirus testing capacity and on the efforts to combat the infection. At the same time, Washington, D.C., advanced legislation to provide financial assistance to unemployed workers and affected businesses. Neither did much to help investor anxieties, however. Stocks slid in the closing hours of the trading week, leaving stock indices near their lows of the week.5
Central Bankers Go Big
The response of global central bankers to mitigate the economic impact of the coronavirus has been broad ranging. In addition to its 100 basis point cut in the federal funds rate, the Federal Reserve also took actions to provide additional credit access to banks, committed to buy at least $700 billion in Treasury and mortgage bonds, and set up a new lending facility to backstop money market funds.6
The European Central Bank also announced an $800 billion-plus bond buying program to support member economies. The Bank of England cut its benchmark lending rate to 0.1% and pledged to buy over $200 billion in government and investment grade corporate bonds, while the Bank of Japan said that it would double its purchases of stocks and increase loans to businesses.7-9
Investors are struggling with answers to two unknowns: the trajectory of the coronavirus spread and its economic cost. With coronavirus testing beginning to ramp up, these numbers may begin drawing a firmer picture of the growth of coronavirus infections in the U.S. Economic indicators, such as jobless claims for unemployment insurance and the Index of Leading Economic Indicators, may provide clues regarding the economy.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: New Home Sales.
Wednesday: Durable Goods Orders.
Thursday: 4th-quarter GDP (Gross Domestic Product) Report. Jobless Claims for Unemployment.
Friday: Consumer Sentiment.
Source: Econoday, March 20, 2020
The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.
THE WEEK AHEAD: COMPANIES REPORTING EARNINGS
Tuesday: Nike (NKE), Carnival Corp. (CCL).
Wednesday: Micron Technologies (MU).
Thursday: Lululemon (LULU), KB Home (KBH).
Source: Zacks, March 20, 2020
Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.
Sound Financial Strategies may be reached at 601.856.3825 or firstname.lastname@example.org
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