Monthly Outlook: April 2020
March 2020 was the craziest month of my 30+ year career. Stocks dropped 33% in just four weeks. The daily moves were so volatile, sounding like annual returns instead. Consider the daily sequence in mid-March: -7.6%, +4.8%, -4.9%, -9.5%, +9.3%, -11.9%, +5.9% and so on. It was nauseating. In the fourth week of March, we saw the typical oversold rally begin and stocks gained +18% in the past six days. For 2020 YTD, U.S. stocks are down -20.2%, and international stocks are down -23.3%. Bonds are up +3.1% and Gold is up +5.8%. Putting it together, the 75/25 benchmark (75% stocks / 25% bonds blend) is down -14.8%. Ready for some good news? Our iFolios strategy of growth and protection came to the rescue and our actual iFolios 75 portfolios are only down -4.4%. Really. So, go ahead and look at your March 2020 Portfolio Review; it’s not that scary.
We Found Our Catalyst
For many months, we’ve been writing about how overvalued the stock market was. We talked about our indicators like TMC/GDP, PE10, and Margin Debt and how they were at peak levels only seen at other peaks including 2008, 2001, even 1929. But, despite the valuations, the price trends of markets remained up-trending and so we remained fully invested for growth. We said we wouldn’t sell until a catalyst sparked a trend change. Trade tariffs, though damaging, were not the catalyst. Skirmishes in the Middle East were not the catalyst. And then, wham!, we suddenly found our catalyst in a virus that spread quickly and globally. In one month, we find ourselves in a global recession and bear market.
How Did We Know to Sell?
No one was predicting a global pandemic earlier in the year. So, how did we know to sell stocks aggressively in late February before the bulk of the crash? Humbly, it’s not because we’re brilliant. It’s simply because our iFolios strategy is rules-based and gives us signals based on the price trends of the markets. On February 27th, for example, the price of the S&P500 dipped below its 200-day moving average price trend, triggering a sell signal to us. So, we sold. Other markets triggered sell signals, similarly. We had no idea markets would fall apart over the next month, but we know losses happen during downtrends. Candidly, we sell every downtrend and some turn out to be real losers and some don’t. When we talk about “iFolios for Growth & Protection,” this is what we mean.
What Now? Do We Buy the Dip?
Already, we see how pundits are confusing investors. Some advocate selling because the sky is falling, and others insist that it’s time to buy the dip. On the one hand, coronavirus and the quarantined economy is likely to cost serious and lasting damage. Corporate earnings will shrink 25%, unemployment will skyrocket to 8%+, the U.S. deficit will swell to $3T, etc. On the other hand, what if the coronavirus passes quickly and the economy gets back to normal soon? Then stocks are priced at a 30%-off sale.
Again, our iFolios strategy is rules-based. And the rules are clear: we will only buy assets that are going up. That is, we buy index ETFs that are trading above their moving-average trendline. Today, not one stock market in the world is up-trending, so we’re staying in protection mode. When the trends change, we’ll change. We don’t have to guess.
We can look to history for clues, however. The average life of a recession and bear market is about 18 months. We are in Month One, today. Valuations last month were similar to 2008, 2001, and 1929. Those bear markets resulted in losses of -50%, -50%, and -80%, respectively. We’re only down about 25%, today. Of course, this time will be different, but we should be prepared for history to rhyme. We’ll remain locked-down in protection mode with cash, bonds, gold, and very minimal (if any) net exposure to stocks. That’s how we’ll minimize losses for now. But we’ll also stay vigilant for reversals and uptrends as opportunities for growth. They’ll surely come even if we can’t say when. For anyone out there who missed the opportunity to sell (not our investors!), our advice is that it’s not too late. Use any rallies as opportunities to trim stocks. As the highway signs to truckers say, “Check your brakes, you’re not down yet.”