Client Alert - Go Long!

CWM models played defense admirably well thus far through the COVID-19 crisis. Valuations across asset classes have fallen sharply, creating an environment where we believe offensive positions can be taken with confidence. Investors should brace for continued short-term volatility.
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Those who have played football, or maybe just passed any round object to someone, have likely used the statement “go long!” Whether it’s backyard football or Russell Wilson playing in the NFL, go long is typically shouted when the quarterback (the guy who throws the ball for non-sports people) sees a good opportunity to score and wants his receiver to make a sprint for the end zone. Going “long” in Wall Street jargon implies that the investor is purchasing an asset with the expectation that in the future, that asset will be worth more than it is currently. Every so often, the stock market presents a rare and significant scoring opportunity and your CWM team believes it is now time to go long!

Not So Long Ago

Twenty business days ago, on February 19, 2020, the S&P 500, an index of large U.S. companies, was at an all-time high and very few could see any risk to what had been a raging bull (upwards moving) market. At the time, and for a few months prior, your CWM team had been warning that markets were getting ahead of themselves and becoming fragile because of deterioration in the underlying data. Market fragility leaves stock markets susceptible to unexpected exogenous shocks; our data models were suggesting significant market vulnerability on the morning of that market high.

Source: Two-Year Asset Intervals. (February 19, 2020). CWM Data Analytics.

Along Comes a Global Pandemic

Fast forward a few weeks from the February 19th market high and the world looks completely different due to the emergence of the ongoing global pandemic. COVID-19, as it’s come to be known, has resulted in large swaths of the human population living under varying levels of quarantine conditions for over two months now. Quarantine conditions are not beneficial to the efficient functioning of a global economy and supply chain, and stock markets were previously priced at levels that implied nothing would ever go wrong again. Once investment markets caught on to the severity of the issue, repricing was swift and brutal with the S&P 500 dropping over a thousand points (-29.5%) from its high through its close on March 16. In just 20 trading days we’ve witnessed the fastest price drop in market history.

Source: Batnick, M. (March 9, 2020). The Fastest Bear Market Ever. The Irrelevant Investor.

It’s safe to say that markets have become more risk aware and are now pricing in at least some downside economic potential. It is also fair to say that fear has gripped the heart of some investors as global markets as a whole have returned to price levels similar to that of October 2007. That’s 13 years of market progress wiped away in 20 trading days. A clear example of why one of CWM’s core philosophies is “limiting large losses is more important that participating in all of the gains.”

Source: Authors, J. (March 12, 2020). A Hellish Week for Markets Isn't Over Yet. Bloomberg.

While dismal, the performance of the major stock indices has understated the damage being done to some subsectors. 

Source: Dow Jones and S&P 500 Understate Performance of Broad Market. (March 12, 2020). The Leuthold Group.

Wait… How Does This Translate Into Good News?

The good news about falling prices is that the activity decreases the potential for future price declines; eventually markets run out of investors who want to sell and lower valuations also have the strongest history for future potential investment gain. This forms the basis of another of main CWM philosophy “buying low reduces risk and creates more opportunity.” Looking back at past examples, since 1939, where markets fell more than 25% in a 30-day period, it can be seen that the following 6-months are down a further ~5% on average, but 1-year, 2-years, and 5-years later are all sharply positive the vast majority, if not all, of the time. This suggests that investors should be able to confidently buy the current sharp sell-off, though they should expect some continued turmoil for the next 6-months or so, with a high probability of a positive return a year or more out if history is any guide. There is no guarantee the current situation plays out exactly like the past examples, but this is encouraging nonetheless. 

Source: CWM Data Analytics. Yahoo! Finance.

The ongoing global pandemic doesn’t necessarily alter the above optimistic data outlook. The arguably worse 1918-1919 Spanish Flu did result in economic recession, as your CWM team expects the current environment may do as well, but it only lasted 7-months, and markets were higher by over 10% in 1918 and 30% in 1919.(1) There is also some positive signs coming out of countries such as South Korea and Singapore, which were affected by COVID-19 earlier than most. These countries are validating the Chinese data that shows falling numbers of new cases and deaths, which suggest this disease can be handled and contained if proper steps are followed. While there will undoubtedly be some longer term economic (and other) effects of the disease and the response to it, its control and containment could set the stage for a substantial stock market rebound when combined with high and rising levels of government economic support.

The current data has now shifted our previously conservative outlook to one of full aggression. The history of similar past economic data conditions is one of sharp market positivity over the longer term (2-years plus), which is reflected in current projections. It should also be pointed out that the traditionally safe asset, long-term treasuries, has a decidedly negative outlook as investors have fled to it and bid its price up to unsafe levels. Displaying yet another main CWM philosophy, “expensive things are dangerous.”

Source: Two-Year Asset Intervals. (February 19, 2020). CWM Data Analytics.

While your CWM team is very optimistic about the future, especially a year or more out, it is unlikely that markets are at their exact bottom. There will likely be some scary days in the near future, but at this point it is proper to practice traditional buy-and-hold investment ideas. That means taking a longer term perspective and having some tolerance of even large price volatility over the next few months. History shows us periods with similar conditions were good times to buy, but those periods also required a good deal of patience because of ongoing market volatility. Please contact us immediately with any questions or concerns. For now, it is time to buckle up and hold on while we GO LONG!

Please pass this article on to anyone you know who may be interested in or might benefit from the information. We are always looking for more great clients like yourself and would welcome any opportunity to assist them.

If you have questions or comments about the above subjects or other investment topics, I would love to have a conversation! Feel free to email me or, if you are interested in more regular financial tidbits, follow me on Twitter @MorganArford.

P.S. The current pandemic experience is frightening, but it is also creating beautiful examples of humanity like the Italians singing to one another to bolster spirits. The linked video is worth a view if you need a spiritual lift. May we all be supportive of one another, and keep our sense of humor, as the entire human race goes through this global pandemic experience together.

1 - Dow Jones - DJIA - 100 Year Historical Chart. (March 16, 2020). macrotrends.

The Performance Targeting System (PTS) TM is an exclusive investment strategy developed by the investment professionals at Comprehensive Wealth Management, LLC. The PTS(r) is based around the idea that portfolios with stable annualized gains, and smaller drawdowns, are preferable to comparable models that try to maximize yearly returns with occasional but significant losses. Utilizing a variety of metrics, the PTS(r) modeling process indicates the ratio of risk versus safe assets a portfolio should maintain in order to help maximize long-term returns (five years or more). Risk assets are targeted to perform better in years with rising equity markets, and safe assets are targeted to perform better in years with falling equity markets. This process potentially allows for overvalued assets to be sold ahead of significant market corrections and undervalued assets to be potentially purchased prior to significant rallies. By working to anticipate the longer-term multi-year market move, the goal of PTS(r) models is to help obtain higher than average benchmark returns with less volatility. No system or strategy can by itself be used to consistently determine which securities to buy or sell or when to buy or sell them. The PTS(r) system was developed using historical data that might not be indicative of future events.

This information has been prepared and distributed for informational purposes only and is not a solicitation or an offer to buy any security or investment or to participate in any trading strategy. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional. Past performance is no guarantee of future results.

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