Rule #1 – Don’t lose money. 

It sounds simple, but in practice, it can be quite a challenge.  Still, as challenging as it may seem at times, it remains the foundation for how we manage money and risk in client accounts.  That doesn’t mean our accounts won’t show negative returns in downturns/difficult periods.  But it does mean that our focus is on limiting that downside as much as possible.

We mentioned last month how the markets were starting to take a break from the drastic sell-off we saw in late-February and early-March.  Through April, there have been rebounds of varying success across the major market indices.  One of the stronger rebounds has been in the NASDAQ (where we’ve focused our investing), while one of the weaker has been in Small Cap stocks.  The S&P 500 has been somewhere in between.

None of the above market indices are positive on their year-to-date numbers as of today (April 23rd, 2020), but the NASDAQ could be close to positive if Friday is good.  But luckily, that is not the case for a handful of our strategy models.  On the whole, we’re seeing less than market losses, with some of our strategies showing positive returns year to date.  Because we are active managers, we were able to avoid the majority of the market’s downside, and we aim to be able to repeat that to the best of our ability as the markets and economy continue to adjust.

The consensus we’re seeing from investor surveys, sentiment, and other advisors is that, at some point, everyone seems to be expecting the market to re-test the lows we saw in March of this year.  If a recession is still game-on, then it’s just a matter of when.  However, right now, we see more signs of strength than signs of weakness.  Not fighting that, we’ll remain cautiously invested while that remains true.

Meanwhile, the long-term market trend data we follow still suggests a negative bias, so we’ll remain quick to sell if we see an increase of volatility (see VIX chart from last month) or money flowing out of the market. 

Oil – ok, this one is pretty crazy.  Below is a chart of the USO (an ETF that tracks the futures contracts of the WTI Oil market).  I didn’t think I’d ever see the price of oil go this low in my lifetime, but here it is.  The red arrow points to the current price of the ETF.  After being somewhat stable in the $40-50 range, and then in the $10-15 range, we’re now much lower in the $2.50 area. 

What happened?  With no one willing to take delivery of physical oil due to the low prices (and low demand), the futures contracts (which are a contract to buy at a set price, often used by airlines) went negative.
That is something we’ve never seen before.  But luckily it had minimal effect on us, as we’ve been avoiding the Energy sector for quite some time now.

Fourteen-year chart of the USO (WTI Oil ETF) Source: Stockcharts.com2

Bonds – the bond market seems to be calming down after its liquidity problems in late March. And many of the hardest-hit areas are recovering, albeit slowly. Many segments of the bond market got so oversold that there are now some good values out there. We will strategically continue to hold or add to some of our bond holdings, as the data suggests.

Our Enhanced Index strategy, tracked at Theta Research, is ranking very well nationally against other investment strategies. We believe this is primarily due to its signal to hold a Money Market fund from two days after the top in February to two days after the bottom in March. For the past few years, this core thinking has been driving much of what we do.  It is amazing to see it do well against some great names in the investment management universe.

We hope everyone is staying safe and healthy, and I don’t know about you, but I’m ready to travel for a summer vacation. But who knows if that will be possible at this point. Here’s to hoping!

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.

2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.