Stock markets took a large hit over the last two weeks. In our 2020 outlook, we expected more volatility, although Corona was just getting started. The good news is that the underlying fundamentals of the economy appear to be good.
We have a pro-growth footing, there is not an obvious overvaluation or bubble, and the US looks to have a strong position economically with other counties. The bad news is, at least until markets work out the implications of COVID-19 – there are already 2 strains, and a vaccine can be developed – stocks and even marginal risk assets will be under pressure.
So, what’s the plan?
Our plan has not changed and has been expressed in our Live Webinars we have been doing since November of last year.
EWG uses a Layered Investment Management (LIM) process that combines portfolios that move to defend in bad markets, along with Structure Income investments (expected to provide strong yields) and traditional static portfolio.
We began making sure clients had increased exposure to more income-generating Structured Income investments in November of last year, specifically in an attempt to dampen an increase in expected volatility.
How LIM might be applied to each client varies, since we customize our approach to the priorities of our client’s individual portfolios. However, most clients are currently are between 15% and 50% cash right now, depending on the investment models used.
Is this a buying opportunity?
Some have asked us about buying opportunities. Earnings of high-quality companies are expected to take a hit, as well as areas like travel, entertainment and hospitality.
For instance, some cruise company stocks are down 50-70%. It’s true that panic can drop prices to bargain levels. However, we caution that it’s possible some companies might not survive. Consider Royal Caribbean’s Symphony of the Seas reportedly cost 1.35 billion to build. Would creditors take the company if these very expensive ships sit largely empty for a year? We do have a buy list but are mindful as to when to apply it.
While buying bargains are great and we will look to participate, we believe that income-producing investments are an important addition. Yes, they will be partially affected by the stock downturn, but their yields tend to continue, despite the market volatility. That yield generally smooths our returns and moves the portfolio forward.
It’s not obvious or clear how the stock market might proceed from here.
We expect markets to bounce sideways, up and down for the S&P between about 3100 and 2850. 2850 has multiple lines of support around this level, as the market considers the economic effects of the virus. However, should 2850 be penetrated with momentum, we could see another 10-12% down leg. We think more bad news may come and our caution is part of being prepared for it.
How Can You Stay Informed?
Trust that we do have our client’s best interests at the front of our minds. Each investment model applied to a client’s portfolio has a specific purpose and we work to stay true to that plan. We encourage you to attend our Live Webinar this week to hear more about our Layered Investing process.
Advisory services offered through EWG Elevate, Inc. dba Eagle West Group.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.