We live in uncertain times. While the current health crisis is novel, we have survived other crises and market traumas. I’m reminded of the advice from my parents: This, too, shall pass. That doesn’t make it any easier though. And when trying to manage client portfolios all the logic in the world may not temper investor emotions. In light of the crisis, I wanted to share my thinking in these confessions of a portfolio strategist looking for a bottom.
In a separate market commentary from one of the many investment asset managers we may use here at Clear View Wealth Advisors, you’ll find that the Global Investment Committee of Nuveen suggests that it is too early to look for a bottom, but there are encouraging signs. Over the past week I’ve been listening into many presentations sponsored by many asset managers. Most have a similar message: It is not time to panic or abandon long-term investment plans but rebalancing should be a top priority while also reassessing personal risk tolerance. This is good advice at any time but particularly true right now.
Personally, I believe that we will see a big change in many sectors of our economy as we deal with recovery in a post-COVID-19 world.
While real estate has always been a good alternative that has not been directly correlated to the market, this may change. In the near-term, real estate will likely perform OK as it has in past recessions because of the stable cash-flow from long-term leases. This assumes that business closures are not overwhelming and companies don’t unilaterally do what Cheesecake Factory has announced to its corporate landlords. But as new real estate leases get written, we’ll likely see clauses that cancel rents during a state of emergency putting more risk on commercial property owners. More businesses and schools will move away from large brick-and-mortar footprints to more virtual models. This may make real estate a riskier asset class.
The beneficiary of this sort of trend will be technology. As in the previous three instances of Quantitative Easing by the Fed, tech and healthcare will likely outperform.
During the upcoming recession, the brightest spots will be consumer defensive areas that have typically been resilient to economic downturns. So, areas that focus on consumer staples and healthcare will likely begin to perform better first.
And one lesson learned from the last financial crisis is that low-debt is a good thing. So, those households and businesses that have lower leverage will be positioned to survive better.
MarketFlex Portfolio Reflections and Changes
In reviewing the damage of the swift market correction that began near the end of February, I’ve had to reassess the way the MarketFlex portfolios have been designed. The general approach of the model portfolios designed by me at Clear View Wealth Advisors remains the same: Offer globally diversified portfolios that combine different approaches – some active, some passive, some high yield, some tactical.
First, the bad news: Client portfolios saw declines ranging from 20% to 30% from their peaks in mid-February. Some models, like real estate, saw nearly a 40% correction. The Dividend Aristocrat model comprised of individual large-cap stocks that have consistently grown their dividends for 25 or more years even went down about 31%. Even short-term bond models saw declines of 4%. As everyone was trying to rush for the exits to find safety and get rid of anything remotely risky, all asset classes dropped.
Now, the good news: Diversification worked. Even though Dividend Aristocrats went down, the model did better than the S&P 500 Index by going down almost 5% less. The covered call strategy used to provide a hedge against a decline of large-cap stocks did OK as well dropping “only” 26% while the index dropped by 31%. Some other dividend-strategy models did better than this though the yields for these are lower. Other income-oriented strategies that included higher yield bonds and closed-end funds continued to pay out above-average dividends to supplement retirement incomes. And clients with higher cash levels tended to weather the downturn a little better.
The allocations of these models were based on aligning the Risk Number of the investments with the client’s individual Risk Number. While there will be time to reassess this in more detail when things stabilize, it seems that it may be better to err on the more conservative side and develop client models that target a Risk Number that is at least 5 points, maybe 10 points, less than the client’s stated Risk Number. And it may be a good idea to consider using a lower allocation to dividend stocks while increasing the use of tactical strategies or even “buffer” ETFs designed to limit the downside.
But the still uncertain path of this virus means that it is hard to predict a bottom. The best we can recommend to businesses and households is to reassess risk, rebalance more often even though it is likely to be painful, and maintain cash for emergencies.