What a month it’s been! Before we get into some portfolio construction thoughts, we would like to remind you of one of Warren Buffet’s famous quotes:
‘Be fearful when others are greedy. Be greedy when others are fearful.’
— Warren Buffett
We realize this is easier said than done. But if the global economy (and stock market) prevailed during prior World Wars, the Great Depression, the Great Recession, 9/11 attacks, the Gulf War, and the 2008 Financial crisis, we believe collectively we will pass through this virus as well.
It’s impossible to time the market. Selling stocks which are down 40% makes little sense as the market has already repriced risk for you (valuations have dramatically declined). In our view, the better risk/reward is to buy stocks when prices and valuations have significantly fallen. Why? 1) you have a greater margin of safety (Seth Klarman’s book; Warren Buffet's approach) and more importantly 2) it’s impossible to time the bottom.
Here are 2 blogs Astoria recently wrote regarding investing in a pandemic stricken world:
How Has a 60/40 Portfolio Performed during Prior Epidemics? In short, it’s not as bad as you would think (click here). We realize this time may be different because of China’s growth in the global economy along with the fact that we don’t have a vaccine yet (although we didn’t have vaccines for the other pandemics either).
How should Investors Position during a Coronavirus Slowdown? (Hint: a lot of the things we talk about in this blog Astoria has been doing in our dynamic portfolios for some time now; click here).
Many are asking, “When will we see a bottom?” Back during the credit crisis, VIX peaked in Q4 2008 but the S&P 500 didn’t bottom until March 2009 (see chart below from Morgan Stanley).
One of the reasons why retail investors might not have sold their stocks (yet) is because on a 3-year and 5-year basis, their portfolios might still be in-the-money (see chart below). Past performance is not indicative of future results.
Some thoughts we have on the current landscape:
The economy is experiencing liquidity problems (although not as severe as 2008), but enough to cause significant disruption in markets.
This began as a health crisis (not enough testing kits, shortage of hospital beds) + monetary failure (rates are at a lower bound) + oil shock + a slow reaction function from world-wide governments. The health crisis has now led to a systematic liquidity crisis. It's amazing how fast liquidity can disappear.....
Last week, the Fed recently offered $1 trillion of liquidity to market participants and approximately $50 bln-ish was taken down. Libor OIS, Ted Spreads, and other funding measures are all spiking higher. This has spilled over to credit markets (HY spreads at 750bps as we write this blog; they reached 1000bps in the ‘01 tech bubble and 2000bps during 2008).
We believe the negative feedback loop from poor liquidity is spilling over to all asset classes. We have seen S&P 500 SPX futures limit down several times, NYSE halted their exchange a few times, and we have seen pretty significant discounts to NAV in many high-profile fixed income ETFs. Good luck getting a bid on a commercial real estate property.
US banks are down 40% in the past 1-month and we believe they are reacting to a potentially negative interest rate environment. Banks in Europe/Japan have been big underperformers over the past 10 years as those countries went to negative interest rates. Oddly though, US banks are significantly better capitalized now than they were 10 years ago.
Because trading and investing is more systematic and dominated by passive, CTA, vol control, and risk parity funds (as opposed to discretionary fundamental managers who made decisions based on fundamentals), we NOW have MUCH sharper (and quicker) drawdowns.
From our perch, the size of the current small businesses, airlines, and the hotel industry is smaller than the size of the mortgage and banking crisis in 2008. By those calculations, one would think the current systemic crisis wouldn’t be as drastic as that of 2008.
There is discussion that the current bear market has been ongoing for a few years and may now be concluding. Market bottoms don’t typically occur until there is fear and panic which we certainly have now (look at the run on eggs, milk, pasta, and toilet paper in the US).
If institutional investors with all their available resources and infinite data/quants can’t time the market, individual investors certainly can not. Time arbitrage is the best edge investors have. We believe there is a reasonable probability that in 12-18 months, high-quality stocks will be above today’s levels.
Talk of fiscal stimulus is driving bond yields higher. Multi-asset portfolios that use solely bonds to hedge equity risk are under-performing quite a bit. When will investors begin to include alternatives in their portfolios? Luckily Astoria has been including alternatives since the day our firm began.
Principally, Astoria believes in globally diversified portfolios including stocks, bonds, and alternatives. These principals have guided Astoria well thus far, particularly in acutely volatile markets. The last few weeks have been an opportune time for tax-loss harvesting in our strategies, of which we'll systematically continue to capitalize on.
Factsheets for all our models can be found here.
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Sincerely,
John Davi
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