Monthly Outlook: March 2020
You’d have to be on an island without services to have missed the fact that stocks crashed in the last week of February. The blame is mostly being placed on the expanding coronavirus pandemic; more on that later. Stock markets were down about 15% in just seven trading days, breaking some records. YTD, the S&P500 is down 7.9%, while international stocks are down 9.8%. On the other hand, bonds are up 3.7% and gold is up 3.9%, YTD. It’s human nature to extrapolate recent experience, so many investors are doing mental math and wondering what happens if the market keeps dropping at this rate. History and evidence suggest that such a straight-line drop is highly unlikely. But trends have now changed, so it’s only prudent to reduce stock market exposure and raise some cash.
Coronavirus Impact
The coronavirus, by itself, is a huge global concern for the health and welfare of those exposed to it. But the market, unfeeling as it is, is freaking out about the widespread shut down of global supply chains. I know, the market is heartless. In just a matter of weeks, companies have shuttered factories, schools have been closed, and travel volume has plummeted. We’re witnessing one of the negatives of globalization. It’s quite eye-opening to realize how inter-connected and fragile we all are and how quickly the global economy can be severely impacted. But is this enough for the market to lose 1/6th of its entire value in seven trading days? Surely not. But fear is contagious, maybe more so than coronavirus. And investors became very fearful, very quickly, last week.
Trends Have Changed
One outcome of the February sell-off is certain: stock markets turned from uptrends to downtrends. We (and many others) define the “trend” as the 200-day moving average trendline. It’s just a mathematical calculation. If a market is zig-zagging higher above this moving average trendline, we call it an uptrend. And vice-versa if it’s trading below this trendline. Most markets – U.S., NASDAQ, International stocks – have been up-trending for most of the past 10 years, with a few blips in 2015/2016 and 2018. But the severity of February’s decline moved nearly every stock market from above the trendline to below it. Let me state it again and very clearly: Stocks are now in a downtrend. And for the record, bonds and gold remain in very clear and strong up-trends.
Portfolio Allocation Changes
So, what does the prudent money manager do when the trend changes from up to down? We change the allocation to reduce risk! As markets tipped from up to down last month, our sell signals were triggered, and we sold many of our stock ETFs to raise cash. As an example, our iFolios 75 portfolios that call for up to 75% in stocks, now have only 50% in stocks and 25% in cash and gold. The 25% remaining is invested in safe bonds. We’ll continue to use market gyrations to further reduce stocks to just 20% to 30%, most likely. “Avoiding the big loss” is one of our basic goals and the only way to do that in a down-trending market is to reduce your exposure to that market. By selling in February, we outperformed the benchmark by losing less. The real benefit will come if the stock markets continue to decline and we’re holding plenty of safe cash.
What’s Ahead in March
Of course, no one can know for sure what markets will do in March. But we can look to history for clues. It’s likely that the 15% correction over just seven days is overdone. History is full of examples where a 5%+ rebound occurs after such a sudden drop, but we’ll see. There will likely be some investors who can’t resist the urge to “buy the dip.” We would recommend that investors “sell the rally” if there is one, instead. Remember, the trends are now down. Even a 5%+ rebound in March will not be enough to change this new downtrend signal. We will use any rebound as an opportunity to sell more stock ETFs and get more protective. If appropriate, we will add some inverse funds to further hedge. And, of course, we’ll hold a full allocation of bonds and gold. March may be volatile, but we’ll invest with the prevailing trend and not get distracted by the daily noise.