By most measures, markets have entered a bear phase and are down almost 20% from all-time highs. The coronavirus, oil rout, and politics have combined to create a perfect storm in the markets. In times like these, what do we crave most? Surely, we all want to be safe and to know that the virus spread has slowed and that a cure or vaccine is ready to be deployed in abundance. We want to have control when none is available. Short of control, the next best thing we hope for under a constant barrage of bad news is…clarity.
S&P 500 Index, month to date, March 2020:
- March 2: +4.33%
- March 3: -2.86%
- March 4: +4.20%
- March 5: -3.32%
- March 6: -1.71%
- March 9: -7.60%
“When you have a 4.5% up day in the market and a 2% down day – what does that mean? It just means we don’t know what’s going on.” – Kathryn Kaminski, AlphaSimplex Group
Looking for Answers in Uncertainty
The quote above is just an example of how analysts are reacting in this environment. This is the same group who just weeks ago was cheering on all-time highs and once again saying ‘this time is different.’
Where do investors traditionally look for answers? Hopefully individual investors first look to their advisor. They will also seek information from friends, the media, or the government. But to whom do the advisors turn? Ultimately, the buck stops with them as they are the ones facing the client, yet often in today’s information-filled world, their sources are the same as their clients.
Wall Street? Nope
“We admit that we cannot fully capture what are fluid developments” – Tobias Levkovich, Citigroup Inc.
“We aren’t getting guidance from companies because companies don’t know what to give, but we know pain is coming on the earnings front. We don’t know what the final numbers will be.” – David Kotok, Cumberland Advisors
Unfortunately, as the above quotes illustrate, answers are hard to come by these days. Wall Street analysts struggle to find meaning or even keep up with the constant changes and gyrations of the market. Fundamental research shops are having a difficult time even obtaining information from the companies that they cover, much less garnering anything useful to provide in the way of analysis.
The Fed? I’m Not So Sure
“It’s unlikely we are going to have that much different of information when we get to the March meeting.” James Bullard, President of the St. Louis Federal Reserve Bank
“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one.” – Jerome Powell, Chairman of the Federal Reserve
Perhaps most concerning are the reactive tendencies and mixed messages coming from the country’s lender of last resort – the Federal Reserve Bank. In the quote above, James Bullard of the St. Louis Fed both echoes the uncertainty expressed by Wall Street firms and attempts to downplay future Fed actions. At the exact same time Fed Chairman Jerome Powell leaves the door wide open for further action even after its most recent aggressive steps in response to the crisis.
Chance Favors the Prepared Mind
“The more you sweat in peace, the less you bleed in war.” – General Norman Schwarzkopf, U.S. Army
Blueprint is not in the business of guaranteeing outcomes. Such an exercise is both fruitless and misleading. That said, a worthwhile goal is to pursue certainty of process as opposed to certainty of outcomes. The key components of Blueprint’s investment process include a focus on asset prices, analyzed over a variety of timeframes, and the disciplined execution of our system. These processes have been developed analyzing many years of data and honed by many years of experience – and developed well in advance of times like these when even the best plans can be challenged.
Focusing on asset prices as our primary input for investment decisions means we never lack data. We are never dependent on company projections, market predictions or ‘expert’ advice. We often say that the asset price is the only thing that should matter to investors as it’s the only thing that moves their account values at the end of the day.
Executing our allocation rules over a variety of timeframes means we can adjust portfolios due to short-term weakness without losing the long-term, goal-oriented focus for advisors and their clients. We can adjust exposures to the minimum level that creates comfort and enhances the ability to stick to the financial plan. Most importantly, disciplined execution ensures we react in a timely way even in the most hectic market environments.
Certainty in Process, Confidence in Outcome
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Despite one of the sharpest drops in the history of U.S. markets, there has not been a moment when Blueprint lacked clarity about how to respond. After entering February participating with equity markets during their long drive upward, we have since halved our exposure to equities entering the volatile first six trading days of March. When our partnering advisors reached out for talking points at the end of February, we provided concrete answers on what adjustments we would make across different scenarios so that they could confidently communicate with their clients.
Clarity in the Face of Chaos
The adjustments made entering March were likely only the first step toward defensive positioning in our portfolios. If equity markets continue to flounder, our systems will incorporate that information and reduce exposure further. If this period turns out to be merely a blip, our systems will incorporate that information as well, and either hold allocations steady or perhaps, in the case of a major rebound, even add back exposure. Portfolio shifts may turn out to be ‘wrong’ in hindsight, but hindsight is a tricky device. Remember, tomorrow doesn’t exist yet and so all we have today is what has happened and what is happening.
In the face of ongoing turmoil, our goal is to create a higher level of clarity for clients with a predetermined, systematic, and well-articulated course of action, whatever results the market gives going forward.
The Blueprint team, from our families to yours, wish you all good health, peace and prosperity in the days and weeks ahead.
For more thoughts on ways to evolve your investment approach visit www.blueprintip.com/the-process/
