World War C: When will the market bottom in the current Coronavirus Pandemic?

Most of the world is now hunkered down. We’re socially distancing ourselves from each other in the tiny clusters of our nuclear families for an unknown period. The stock market has plunged at a record speed, wiping out gains made since December 2018, and with fears of more selling to come. But there is light at the end of the tunnel as efforts are underway on various fronts, healthcare therapies and Government financial stimulus, that may show us the path forward. And finding that path is the key for the markets.

One of the questions I’ve been getting frequently from clients and peers: is this like 2008 (the Global Financial Crisis), 2000 (dotcom bust), 2001 (9/11), 1987 crash? This crisis is like none of those prior ones, and yet it’s like all of them.

We need to go further back in history to find an event that may offer us both insight and foresight. We need to look at World War II. Obviously, we are not in a global military conflict, but we are in conflict against an unseen enemy at a global scale.

When WWII started in 1939, the S&P 500 Index, if it had been in existence at that time, would have started correcting from around 12 and dropped to 7.47 in 1942 (see chart). Counterintuitively, the market didn’t start its march upward when we won the war. Rather it started rallying once there was a path forward towards victory. That turning point occurred in 1942, three years before the war ended, sparked by the Doolittle Raid on Tokyo followed by the victory at Midway.

Source: Bloomberg
The Launch Date of the S&P 500 Index is March 4, 1957; all information for the index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight.

The market tends to move to extremes when driven by investors’ fear and greed. And it currently seems to be reflecting the worst fears of a wholesale economic shutdown.
Our current fight is on four fronts:

  • Local response: City and state authorities are doing what they can to marshal their local resources and infrastructure to slow down if not stop the spread of Covid-19. We are living this ourselves daily. This is a sudden shock to local economies, but a necessary step in this fight. Our social distancing efforts are working and we are already seeing an effect on the contagion curve in Washington state and New York.
  • Healthcare response: This is the front line. Thousands of healthcare professionals are fighting to protect and save lives. Scientists and researchers globally are racing to find a vaccine and therapies are being rolled out and studies as we write this and they are having better success than expected. This is the long-term solution but will take time to achieve. A vaccine is the victory we’re all after, but current therapeutics will greatly reduce the contagion curve we were expecting. We are currently seeing a leveling off of new cases in New York and a reduction in Washington State.
  • Fiscal Response: The US Federal government is working to provide short-term and near-term support to the halting national economy. Through the Stimulus package passed last night by the Senate, tax relief, programs for small and medium sized businesses and even direct cash is on the way to help those most affected. This is necessary, but we will need more, and we will need it fast as we move forward, in the shape of long-term programs and projects to help get the economy on its feet again. Unfortunately, this will be expensive – but if we can spark growth to return on a broader scale, we will be able pay our way out of it over time.
  • Monetary response: This is the financial front line. The need is immediate, and the fix is necessary. The Federal Reserve (Fed) is deploying an ever-increasing set of tools at its disposal to keep the financial markets from seizing up. The Fed has announced it will do whatever it takes to Keep credit flowing through Quantitative Easing (QE), providing USD Swap lines to other central banks, trying to flatten the yield curve as investors dash to cash, etc., are critical. But we need more.

The market needs more QE to stabilize. It’s a very acute problem that can have cascading effects on the rest of the global economy, such as corporate bankruptcies and large-scale unemployment. The Fed’s announcement of the enormous QE Unlimited program leading a round of fresh new buying for those who need to sell may provide the floor to those liquidity risks. Given the scale of the potential economic slowdown, the Senates plan for fiscal action is a little late but will give us much needed assistance in restarting our self-imposed stall to our economy. The current Senate Plan gives us a view of some stability, or a way out of the tunnel through these efforts, we expect the market will rally back in anticipation of that recovery.

Portfolio positioning for our Doolittle moment

Just like in WWII, it seems to us that the market will rally before the war against COVID-19 is won. So, while we don’t know exactly when the Doolittle Raid-equivalent will be against COVID-19, we like the following areas of focus to prepare a portfolio:

  • High Quality: Focusing on the highest quality companies in the universe has historically worked well in this type of environment. For example, by allocating to companies with a proven record of increasing their dividends over time.
  • Systematically Tactical: A tactical allocation approach can be an effective tool to de-risk a portion of the portfolio when market trends begin to shift. However, with these types of strategies it’s also important to have a disciplined action plan to put money to work back in the market when it feels the most difficult. To combat behavioral finance headwinds, we prefer systematic strategies that move to cash and reinvest automatically to navigate these environments.
  • Dollar cost average: Given the speed and steepness of the selloff, consider rebalancing into stocks in small increments over time.
  • Active Fixed Income: We believe in actively managed fixed income strategies. In these volatile markets, it becomes paramount to find managers and strategies that can independent evaluate the credit and liquidity risks within a portfolio and, perhaps more importantly, take advantage of opportunities that arise from fear and forced selling.
  • Relative Valuation: Based on our relative valuation work, we like (1) Value stocks over growth stocks. After underperforming for years, Value may be well positioned for a rebound rally. (2) Strategies that risk weight instead of market cap weight. During this selloff we have seen all names being cut, but the severity of decline has been generally been sharper as you go down in market cap, with the largest mega cap growth names holding up better on a relative basis. We think many of these same securities outside the largest mega cap growth companies could potentially ride a tailwind when the market starts to recover.

Source: Victory Capital

Sincerely,

Fortem Financial
www.fortemfin.com
(760) 206-8500

 


Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

Disclosures:
Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client’s experience or of the Firm’s future performance. Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
Fortem Financial 2016. All rights reserved.

Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fortem Financial

PRIVACY NOTICE REGARDING CLIENT PRIVACY

Fortem Financial Group, LLC, has adopted this policy with recognition that protecting the privacy and security of the non-public personal information we obtain about our customers is an important responsibility.

All financial companies choose how they share your non-public personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your non-public personal information. Even when you are no longer our customer, we will only share your non-public personal information as described in this notice. So, please read this notice carefully to understand what we do.

The types of non-public personal information we collect and share depend on the product or service you have with us. This information can include items such as your Social Security number and income, your account balances and transaction history, and your investment experience and account transactions.

We collect your non-public personal information in a variety of ways. For example, we obtain your non-public personal information when you open an account or give us your income information, tell us about your portfolio or deposit money, or enter into an investment advisory contract. We also collect your non-public personal information from other companies. For example, from the custodians who hold your account assets.

All financial companies need to share customer’s non-public personal information to run their everyday business. Below, we describe the reasons we can share your non-public personal information and whether you can limit this sharing.

We share your non-public personal information for our everyday business purposes such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, report to credit bureaus, to protect the confidentiality or security of your records, or as permitted by law. We may also share your non-public personal information for our own firm’s marketing purposes; so that we can offer our products and services to you.

Federal law gives you the right to limit only sharing non-public personal information about your credit worthiness for our affiliates’ everyday business purposes; sharing non-public personal information about you with our affiliates to market to you; and sharing non-public personal information with non-affiliates to market to you.

We don’t share non-public personal information about your creditworthiness with our affiliates for their everyday business purposes. We don’t share your non-public personal information with our affiliates to market to you. We don’t share your non-public personal information with non-affiliates to market to you. We also don’t share your non-public personal information for joint marketing with other financial companies. State laws and individual companies may give you additional rights to limit sharing.

We share non-public personal information with our parent company affiliate, Focus Financial Partners, Inc, for its internal and external auditing purposes. We also share your non-public personal information with a non-affiliate for the purpose of aggregating it and providing summary information based on this data to our parent company, Focus Financial Partners, Inc.

To protect your non-public personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.

Our policy about obtaining and disclosing non-public personal information may change from time to time. We will provide you notice of any material change to this policy before we implement the change.

If you have questions please call us at 760-206-8500 or go to our website at www.fortemfin.com.

IMPORTANT CONSUMER DISCLOSURE

Fortem Financial Group, LLC ("Fortem Financial" or the "Firm") is a federally registered investment adviser with offices in California. Fortem Financial and its representatives are in compliance with the current registration and notice filing requirements imposed upon federally registered investment advisers by those states in which Fortem Financial maintains clients. Fortem Financial may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

This website is limited to the dissemination of general information regarding the Firm's investment advisory services offered to U.S. residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of Fortem Financial' website on the Internet should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment, tax or legal advice. Furthermore, the information resulting from the use of any tools or other information on this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from Fortem Financial. Any subsequent direct communication from Fortem Financial with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. Fortem Financial does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to this website or incorporated herein, and takes no responsibility therefore. All such information is provided for convenience purposes only and all users thereof should be guided accordingly.

All statements and opinions included on this website are subject to change as economic and market conditions dictate, and do not necessarily represent the views of Fortem Financial or any of their respective affiliates. Past performance may not be indicative of future results and there can be no assurance that any views, outlooks, projections or forward-looking statements will come to pass. Investing involves risk, including the potential loss of principal, and the profitability of any particular investment strategy or product cannot be guaranteed.

Any rating referenced herein may not be representative of any one client's experience. Further, the Firm's receipt of any rating is not indicative of the Firm's future performance. The Charles E. Merrill Circle of Excellence award is granted by Merrill Lynch for outstanding client service and satisfaction. The award is granted based on annual criteria established by Merrill Lynch for its top decile advisors. The Barron's Top 1,200 Financial Advisors rating of the top financial advisors in the United States is based on data provided by participating firms. The following factors are included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance is not an explicit component. The Five Star Professional award is granted by Five Star Professional and recognizes service professionals who provide quality services to their clients based on data provided by participating firms. The award is granted based on the following ten objective eligibility and evaluation criteria: credentialed as an investment advisory representative (IAR) or a registered investment advisor; actively employed as a credentialed professional in the financial services industry for a minimum of five years; favorable regulatory and complaint history review; fulfilled their firm review based on internal firm standards; accepting new clients; one-year client retention rate; five-year client retention rate; non-institutionalized discretionary and/or non-discretionary client assets administered; number of client households served; and educational and professional designations. Feedback from consumer surveys will augment a regulatory history review. Firms have the option to provide input on award candidates from their firm, regardless of the nomination source. The Palm Springs Life's "40 Under 40" Rising Young Professionals to Watch in the Coachella Valley is based upon nominations from the local business community and selected by the staff of Palm Springs Life.

For information pertaining to the registration status of Fortem Financial, please refer to the Investment Adviser Public Disclosure website, operated by the U.S. Securities and Exchange Commission, at www.adviserinfo.sec.gov., which contains the most recent versions of the Firm's Form ADV disclosure documents.

ACCESS TO THIS WEBSITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEBSITE OR ANY THIRD PARTY WEBSITE REFERENCED HEREIN.