Review
We are in unprecedented times as the Covid-19 virus has caused the majority of the world population to dramatically adjust their lives. We all have been impacted by the social distancing mandates in one way or another. World economies have been halted, resulting in the worst first quarter in the history of the markets. Declines from the record highs were close to 40% as the uncertainty caused massive panic selling. Fortunately, asset allocation worked it’s magic and our portfolios buffered losses and set us up to take advantage of reduced equity prices.
Outlook
I’ve stated many times before the market does not like uncertainty. I believe the market over the last 2 months supports some of that theory. There was so much uncertainty surrounding what this disease was going to do to the world, and for how long, panic selling ripped through stocks. However, in the last few weeks, there has been a roughly 20% rebound in the markets while much of the world is still on lock down. Corporate earnings have declined, and unemployment is heading toward record levels. Why? There are several reasons.
The US government has provided some certainty around the economic impact by providing an unprecedented level of stimulus. There is a tried and true mantra of “don’t fight the Fed”. The Federal Reserve has all but guaranteed they will throw whatever stimulus is needed to keep the economy afloat until we can get back to work.
There has also been some ease of worry surrounding the virus. The data suggests that the US may be at peak numbers for new cases and may start seeing a decline any day. In addition, there are many potential treatment drugs that are showing promise to both treat and potentially prevent Covid-19.
Although it feels great that markets have rebounded sharply, we are still not out of the woods and need to be flexible in our expectations. We have to remember the country is still not fully open for business. Until we are, and until there is a treatment for the virus, markets can still be fragile and volatile. It is our expectation we may see another test of the 2200 low on the S&P 500 but believe any significant pull back should be used to increase equity exposure.
In my notes to clients, I have consistently stressed the importance of asset allocation. We have buffered the losses and are positioned to take advantage of the situation.
Equities
Our current expectation is we may see increased volatility now that corporate earnings season is upon us. We will use any sharp decline to increase equity exposure in anticipation of a normalized market as early as the 4th quarter of 2020. However, as situations change around business re-openings and virus treatments, so to may our expectations for a normalized time frame.
Fixed Income
The bond market has been the star of the selloff, however, with yields at historic lows and bond prices at highs, we have opportunistically taken some exposure out of this area and will look to reallocate to areas that can provide a healthier yield.
Alternatives
At the beginning of the crisis, we took a small position in gold across our models for protection. As the world starts to normalize, we will look to exit this position and reallocate to undervalued areas.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
