By John Forlines III
In our March Markets in Motion and our Envestnet hosted webinar, we focused on the need in a financial crisis (whatever the origin) to help craft easy-to-understand, longer-term narratives for Advisors and their Clients.
Panicking and abandoning diversified investment strategies during volatility and market crashes/surges is a time-tested losing proposition. This update is going to center specifically on our current view, with an intent to update everyone as we process critical data and information from our proprietary research as well as corporate and governmental sources.
Source: BCA Research
1) The economic recovery from the recession-conditions we have entered is most likely “U”-shaped. We have noted that “event driven” recessions are typically shorter in duration and are accompanied by severe initial market crashes followed by quick rebounds in economic and market conditions—the “V”-shaped recovery. Our data is indicating that we will not get a reliable forecast of top-down corporate earnings until at least late 3rd or early 4th quarter this year. That injects more uncertainty over a longer period of time, thus:
Source: Goldman Sachs
2) Market volatility will likely stay high during this longer-than-anticipated period of uncertainty. We believe for now–dependent on additional data on the economy re-opening and re-building, as well as very large improvements in virus testing and treatment therapies– that the equity markets will be subject to a handful of “ups and downs.” The best proxy we have is the last meltdown in 2008-09, where an initial crash was followed by six sizable bounces, leading us to conclude:
3) That a conservative portfolio of high quality equities and a recession-level amount of short term treasuries and near cash equivilents is the prudent tactical allocation right now. If there’s a vaccine or a massive improvement in testing capibilities between now and the 4th quarter, which results in a far faster ramp-up of economic activity and resultant confidence in corporate earnings estimates, then we will capture a decent amount of upside and have opportunities to employ cash for our growing “post-virus” shopping list. To go back to where we started—we’d be delighted with a quick “V” shaped economic and market recovery, which equity prices seem to be signalling currently, but are not convinced we want to bet a large amount of risk on that scenario. Adaptability to new data is embedded in the GT process, and we will be vigilent in protecting client assets and alert as opportunities unfold.
With this month’s positioning, we recognized that credit and financial conditions have continued to deteriorate while risk assets rallied sharply, and we took steps to de-risk our portfolios; we sold our US value equities, European equities, emerging market equities, preferred stocks and commodities to raise cash equivalents. We will continue to be data dependent and evaluate further changes in positioning.
Finally, know that all our Strategies will adapt to fundamental or rules-based, not emotional influences. We seek opportunities for solid risk adjusted returns and to preserve capital in asset market downturns.
Recent Portfolio Changes
We exited our positions in US Value equities, European Equities, Emerging Market Equities, Preferred Stocks and Commodities to raise cash equivalents. After a sharp rally for risk assets, we took steps to meaningfully de-risk our portfolios amid unprecedented volatility and deteriorating financial conditions.
Please do not hesitate to contact our team with any questions. You can get more information by calling (800) 642-4276 or by emailing AdvisorRelations@donoghue.com. Also, visit our Sales Team Page to learn more about your territory coverage.
John A. Forlines III
Chief Investment Officer
1. Information as of 4/15/2020.Individual account allocations may differ slightly from model allocations.
2. Contains international exposure.