In my commentary last month, we began to address what was causing the market decline and how volatility, fear and doubt had returned. This month I opted to delay my commentary by a couple of weeks to gather more observations about the market, perhaps even with some hope that the market conditions would improve. But as we’ve seen so far this month, not much has changed, and what I said before still holds true: until the uncertainties around the tariffs go away, we expect things to be choppy for a while. While this newsletter goes out to both clients and non-client subscribers, I’d like to direct this commentary to our current clients who, despite having active management, still have seen declines in your accounts. I hope to dive under-the-hood a bit more in this newsletter so you’re aware that our strategies have been making adjustments.
Before we dive in, let me say this: If you have any concerns about your account(s) and you’d like to talk or get an update on your strategies, please reach out and we can schedule a quick Zoom meeting to review. I can then add more context about how your strategies are adjusting.
Okay, so where is the market at? So far, all 3 major US stock market indices (the Dow, the S&P 500, and the Nasdaq Composite) have seen losses year-to-date. The markets were already having a rough time leading up to the tariff announcement on April 2nd. Then went on a roller coaster ride shortly after the announcements, experiencing both steep declines in the two days following, and a near-historic gain the week after.
In response to the market turbulence over the last few weeks, several tactical strategies (especially those managed by Global View) have already adjusted, with more and more managers going to cash and defensive positions like short-term treasuries in the past month. However, because we tend to diversify our clients’ portfolios by using different ‘non-correlated’ managers and strategies, each of whom have their own rules around when they enter or exit the market, you may continue to experience both upward and downward swings in your accounts depending on how much equity exposure you have at the time. This process is fluid and can change at any time and also depends on how aggressively we’ve designed your portfolio based on your risk score and what types of strategies we’ve used. Some, like the Global View strategies, hit a long-term “Sell” signal on April 3rd, and those strategies are now fully on defense. But because they are based on long term signals, they will mostly remain on defense until there is a clear re-entry back into the market when a new long-term uptrend is evident. Then there are strategies that are more short-term in nature and will make adjustment more frequently based on short-term and intermediate-trend signals.
Prior to this month, the correction (which is defined as a 10% drop) was in some way expected, as we haven’t really had one in a while (and those are typically occurring each year). But unlike COVID when there was real uncertainty, the biggest driver today is really the overreaction to the tariffs announced, as uncertainty around disruptions to global trade mount. Tariffs continue to be top-of-mind since then. Unfortunately, the media and the talking heads aren’t really helping. So, we will likely see a lot of choppiness until uncertainty is removed. But this isn’t really anything new, as this situation is an echo of Trumps 1st-term trade war with China. And while it will be better long-term as global trade is brought back to a level playing field, expect to see one headline after another influencing investor sentiment.
Currently, the market is oversold and at times, oversold markets can lead to counter-trend, relief rallies like the one we saw on April 9th, when the market saw record-breaking gains in just one day. This leads to another important point: There are times that being fully defensive and out of the market can also negatively impact a portfolio if you aren’t able to participate when the markets suddenly swing upwards. This sudden reversal is referred to as a whipsaw. We can alleviate this when we have different strategies inside a portfolio. And although your portfolio may already be partially on ‘defense’, having other non-correlated strategies that can take full advantage of a sudden reversal can help offset this whipsaw effect.
For most of you, you also have strategies in your portfolios that are “leveraged”, which means that when markets have a swift decline like we saw on the Thursday and Friday following the tariff announcement, those strategies get double the impact on the downside. However, as markets settle or when they go up as they did on April 9th, it’s also those very same strategies that pick up more than the market (usually 1.5x or 2x the market action). While in the ‘long run’ we can demonstrate time and again that these leveraged strategies can really help boost gains in a portfolio, these strategies are mainly ‘alpha seeking’ and are not best suited for short-term downside protection. So, during periods where there might be rapid or successive declines, you will experience the downside impact, even to a higher degree. I then have to remind my clients that the best thing to do is to let these managers manage, despite seeing losses in the short term. Again, we can dive into your specific portfolio to add more context if you’d like to review.
While we could have another significant rally any day, as I told a client the morning of April 9th, “don’t get too excited about how the markets are doing any given day right now because we’re not yet out of the woods and it will still be bumpy”. The first half of this year could continue to be very volatile as our administration reorders decades of trade policy.
The Bottom Line: Please know that your account is tactically-managed. I have told several clients that for now we need to let the managers navigate the current state of the markets, maintain a proper ‘long-term’ perspective and not act emotionally as that’s when mistakes can happen. Some clients have asked about other alternative asset classes like getting exposure to Gold or other precious metals. Gold has been a strong performer over market indices this year and the past three years, making it a viable diversifier for your portfolio. If you have an interest in discussing our tactically managed gold strategy, please let me know. As with any conversation around strategy, we’ll put everything in the right context and will always tie it back to your overall plan and timeline.
Please feel free to email or call me if you would like to discuss your account. Otherwise, our strategies will continue to respond based on what the data tells us. Thank you.
