March 23, 2020
Don Keeney, CFA, CFP
Principal, Portfolio Manager
We have officially reached the point where the phone is ringing with regularity. I have been pleased with the general attitude of those calling. I credit you all for keeping your head on your shoulders and for trying to think logically about the new environment that has been pushed on us in short order. Times have certainly changed; and have done so in an incredibly short period of time. Historically speaking, it typically takes a bear market (down 20% from its peak) about eight months to fully form. This time, it took less than a month. These are not quite unprecedented times, since this nearly happened in December 2018. We are trying to stay in front of our clients and are trying to keep you informed on our thinking as often as is possible.
So, in that vein, I am writing to share with you the top three questions I have been getting the past week or so. I hope this helps those of you who I have not had the opportunity of speaking with, and really helps you get an insider’s view of what we are doing/working on daily.
- What does M Capital Think about this volatile stock market? What is the best thing to do given that position?
Frank has done a thorough job keeping everyone informed about the coronavirus, about the economic impact(s), and about the various monetary and fiscal policy responses. These responses are changing daily as it is becoming clear that all authorities, on a global scale, are going to do everything needed to make sure people and businesses get support. So, I thought I would look at things from a different perspective.
The market is being driven by fear and by constant and material changes in expectations. It is not being driven by current economic numbers, not being driven by current coronavirus confirmed cases or even by upcoming first quarter company earnings. The market is trying to come to grips with the severity and the duration of the virus on a global scale. The market is trying to decipher if the economic shutdown the government is forcing on its citizens will be successful in stemming the spread of the virus. Or will it only delay the inevitable. “Flattening the curve” is becoming a household phrase and it is causing the market a great deal of uncertainty.
What we are wrestling with on a daily basis is how do we apply our fundamental, economic-based research approach to a stock market that is effectively being driven by people’s expectations on the changes in people’s expectations! Our time-tested investment process vs the irrationality of the current market. The two methods are not easily compatible. So, we essentially have two choices:
1) Market timing
Taking this approach requires us to make two decisions – how/when to get out of the market and when to get back in. We do not believe this strategy can be employed successfully over time. There have been many studies showing that to be the case and there are even more studies showing how an investor’s long-term portfolio performance can be materially damaged by missing just a few of the best up days.
2) Maintain our long-term focus
While it doesn’t feel good to hear that your investment manager is staying pat in this changing market and changing economy, but that is in fact the current best path forward. We are constantly looking to apply sound investment intellect to the available investable options in front of us. Which companies will be hardest hit; which will see a lasting negative impact long after the world “goes back to life”? Which will actually benefit from social distancing? Which companies have a strong enough balance sheet to survive; and maybe even invest in technology and employees during this period? Lots of discussions are going on and we are constantly working on investment options.
We are preparing for the environment that is going to emerge following this time of stress. We have confidence in the dissipation of fear powered by the pandemic. We have confidence that the stock market will begin to show signs of life as soon as the depth or duration of the outbreak becomes a bit clearer. No one has answers about the now, but we are formulating answers on the future and will be looking for the right time to implement these investment strategies in a prudent and responsible manner.
- How is M Capital Advisors thinking about the volatility?
The volatility has been something to behold. We had eight consecutive sessions of quadruple digit moves in the Dow Industrial Average. The market averages have been bouncing around like a ping pong ball as the flow of information continues at a torrid pace. Each piece of information is setting the tone and the tone compounds and feeds on itself. This is not hard to understand considering computers are responsible for 80+% of the trading volume on any given day. And keep in mind that is on a typical day! I have seen estimates of over 90% during the past few weeks.
Volatility, unfortunately, is here to stay for a while. With fear so pervasive and pre-emptive irrationality driving the market and society currently, it doesn’t seem reasonable to expect a decrease in volatility in the short-term. When the world finds some clarity on the pandemic (depth and duration), the world will be able to better discount its impact and will then be able to look past it.
- Is my asset allocation still correct? How do I need to think about that?
This question has been the question I have received the most. It is typically not the first question I get, but it is the question that inevitably gets asked during the conversation. And I think it is a great question! I obviously can’t answer that specifically for any one of you here, so call me if you want to discuss further … well, after reading this answer at least.
Many of you know the lengths that I go through to properly assess your target asset allocation. I consider your risk tolerances and your financial tolerance. I consider the types of accounts you have, what are your short, medium and long-term needs for the money and include all of your financial assets in the analysis. I take this information and run it through a Monte Carlo simulation. This monte carlo simulation effectively runs your investment accounts through 500 different market moving iterations to help determine a confidence level in your money outlasting you.
The resulting asset allocation is a process and you must be comfortable with the result. The analysis is intentionally a long-term analysis. The goal for many is “to take only enough risk to allow me to do whatever I want over the remainder of my life”. I have confidence in this long-term approach. It doesn’t mean that we can’t, or shouldn’t, change it, but it does mean that we have at least considered this particular type of bear market in the equation already. Asset allocations should be adjusted for changes in lifestyles, changes in family situations (health), changes in long-term risk tolerance (getting older) and a few other things. A bear market (or two, depending on your age) was incorporated into the original planning, and is not by itself enough to warrant a change in the allocation.
Hopefully, this provides a good construction of when and why we should seriously consider a long-term asset allocation change.
If you have a question or need further information, please contact:
Don Keeney, CFA, CFP, Principal & Portfolio Manager in Nashville at 615-866-0882, or firstname.lastname@example.org
Claude Koontz, CFA, Principal & Portfolio Manager in San Antonio at 210-353-0519, or email@example.com
Mastrapasqua Asset Management, Inc. does business as M Capital Advisors.
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Nashville, TN 37205
200 Concord Plaza, Suite 500
San Antonio, TX 78216
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The information and opinions contained in this report should not be treated as fact or as insight that will produce desired investment results over time. Investment conclusions always bear risk, and that risk may not be reasonable for any particular reader. Obviously the writer, even assuming good intentions, does not know of the reader’s particular financial circumstance and therefore is not able to assess the propriety of whether a named security makes sense as part of a given individual, family, or institutional portfolio. Mastrapasqua Asset Management clients may, from time to time, own some of the companies mentioned. We hold out no duty to give readers of this column advanced notification of when we may change an opinion. To our knowledge, none of the information contained in our column would, when it becomes publicly available, have an influence on the valuation of a particular stock. Investors should receive investment advice based on an assessment of their own particular investment circumstances and not on the basis of recommendations in this report. Past performance is not indicative of future returns.