Volatility/Downside Protection

Thus far in 2020 and throughout the COVID-19-induced sell-off and partial recovery, there has been a pronounced size and style bias within the US equity market in favor of growth over value and large-cap over small-cap.

The price of Regular and Premium are up eight and six cents each, respectively, from last week. According to GasBuddy.com, Hawaii has the highest average price for Regular at $3.04 and Mississippi has the cheapest at $1.57. The WTIC end of day spot price closed at 34.35, an increase of 8.5% from last week.

For investors searching for yield in volatile markets, corporate credit may be the answer.

To get a handle on the state of U.S. small caps after the pandemic-induced losses in early 2020, we ask: How did the U.S. small-cap group perform relative to other market-cap groups during the several years through 2019? How did they perform during the downturn...

The last decade has been hard on value investors. Even the most disciplined disciples of Graham and Dodd, who have diligently sought bargains that were out-of-favor with the market, have fared poorly relative to growth investors. But the market volatility that began in February has exposed the kind of market dislocations that value investors crave.

Roth IRAs look very appealing following market volatility and warnings that tax rates are bound to rise.

Led by declines in production- and employment-related indicators, the Chicago Fed National Activity Index (CFNAI) fell to –16.74 in April from –4.97 in March. All four broad categories of indicators used to construct the index made negative contributions in April, and all four categories decreased from March. The index’s three-month moving average, CFNAI-MA3, decreased to –7.22 in April from –1.69 in March. Following a period of economic expansion, an increasing likelihood of a recession has historically been associated with a CFNAI-MA3 value below –0.70.

When the COVID-19 crisis shook markets in March, the Federal Reserve moved early and aggressively to help increase liquidity in financial markets.

• Leaders are an ‘open book’ when discussing future action
• Equity market will not ‘turn the page’ on volatility just yet
• A vaccine would alter the COVID-19 ‘narrative’

Russ highlights the surprising resilience of technology stocks this year.

Though I loved working from home, I now realize that it came at a cost – in March and April I destroyed most of the good habits I had worked very hard to build over the last few years.

Down equity markets plus low interest rates can make GRATs a tax saver for high-net-worth clients.

Against this backdrop of anything-goes spending, the idea of having a national currency backed by a real asset like gold seems less and less crazy to some. Doing so, it’s believed, would force lawmakers to practice fiscal discipline, reign in inflation and normalize international trade.

We finished the Virtual Strategic Investment Conference yesterday. I shared some highlights in last week’s letter, will tell you more today.

On April 9, Memphis-based Southeastern Asset Management announced that it was re-opening its Longleaf Partners Small-Cap Fund (LLSCX). It had closed the fund to new investors in August 1997. I interviewed two of the fund’s managers, Staley Cates and Ross Glotzbach.

If rates stay low, the returns on stocks will be better than for bonds, according to Leon (“Lee”) Cooperman. “Bonds are the high-risk investment,” he said.

With markets starting to make a comeback, our Multi-Asset Solutions CIO Ed Perks looks ahead to second half of the year, including the implications of the US economy opening up, the ongoing impact of the massive monetary and fiscal response, and the risk for a wave of downgrades and defaults.

China's economy looks to be well on its way to recovering from the coronavirus-imposed lockdown with consumer spending, manufacturing and investment bouncing back. But can we trust China's macro numbers?

Small-cap stocks were hit harder than large-caps in the coronavirus sell-off. But given the extreme market dislocations, select smaller companies with innovative advantages could offer investors a surprising source of diversification for the uncertain times ahead.

Is it possible the Fed over-reacted to a natural disaster? There are two different types of “recessionary” events that occur throughout history. The first is a “business cycle” recession, which happens with some regularity as excesses build up in the economy. These cycles generally take 12-18 months to complete as those excesses are reversed.

Chief Investment Officer Terri Spath's latest commentary discusses three reasons why we believe using a tactical investment approach, like the one used at Ocean Park, may be the best way to mitigate losses and preserve client wealth.

The latest Manufacturing Index came in at -43.1, up 13.5 from last month's -56.6. The 3-month moving average came in at -37.5, down from -10.9 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. The Six-Month Outlook came in at 49.7, up from the previous month's 43.0.

Whiplashed investors have been thankful for a dose of calm, but signs are emerging the lull may not last.

Rick Rieder, Russ Brownback and Trevor Slaven contend that even as markets were rocked by uncertainty as the coronavirus lockdowns began, the seeds of stability were sown in the massive fiscal and monetary policy response. The key is to know how to manage through this period for the long haul.

A brief monthly update on what's happening in the municipal bond market....

Capital markets are in disarray in reaction to the coronavirus crisis and the necessity of pausing the global economy. The CBOE Volatility Index (the VIX) rose to over 80 in March and thankfully has settled down to a level of about 35, which is still over twice its trailing five-year average of about 15.

In a down market, one of the types of investments that should perform well is long-short funds. But not all those funds have given investors the downside protection they need. I am talking today with the manager of a long-short fund that has delivered this year. 

We are big fans of Buffett’s theories about businesses with low capital requirements and the ability to throw off cash to owners. Unfortunately, he recently emphasized indexing and didn’t shy folks away from today’s glamour tech stocks which require more and more capital

"Travel on all roads and streets changed by -18.6% (-50.6 billion vehicle miles) for March 2020 as compared with March 2019. Travel for the month is estimated to be 221.0 billion vehicle miles." The 12-month moving average was down 1.54% month-over-month and down 0.5% year-over-year. If we factor in population growth, the 12-month MA of the civilian population-adjusted data (age 16-and-over) was down 1.59% month-over-month and down 0.9% year-over-year.

The U.S. Census Bureau and the Department of Housing and Urban Development have now published their findings for April new residential housing starts. The latest reading of 891K was below the Investing.com forecast of 927K and a decrease from the previous month's revised 1.276M.

The U.S. Census Bureau and the Department of Housing and Urban Development have now published their findings for April new residential building permits. The latest reading of 1.074M was a decrease from 1.356M in March and above the Investing.com forecast of 1.000M.

Wall Street will proclaim that any increase in economic activity is a good sign. But, according to Jim Bianco, even a recovery to 90% of pre-crisis levels will be terrible.

What to own, how to do so, and when are the most important questions investors face. In my article, I discuss how a framework of collateral, leverage, and volatility can be used to help answer them.

This article discusses the elements of the new standard and proposes some considerations for written supervisory procedures that establish practices and procedures reasonably designed to ensure compliance with Reg BI and training tips to demonstrate the efficacy of those policies and procedures.

Visualizing your retirement savings not as dollars, but as tokens – like those used as the medium of exchange in amusement parks – will help retirees overcome the pernicious bias of myopic loss aversion. Visualizing your retirement savings not as dollars, but as tokens – like those used as the medium of exchange in amusement parks – will help retirees overcome the pernicious bias of myopic loss aversion.

The COVID-19 pandemic threw us into a bear market and the longest bull market in history was over. Here's a roundup of some informative charts, including the S&P 500, changes in the Dow, NASDAQ, and S&P since 2000, and a few more that are relevant.

Formula 1 celebrated the 70th anniversary of its first World Championship this week! More than four million spectators attended last year, many of whom were looking forward to commemorating the start of the landmark season this past March. Unfortunately, like many other events, COVID-19 forced Formula 1 to postpone its events for the foreseeable future.

After a significant recovery from March lows, coronavirus-driven fluctuations have reappeared in equity markets.

April saw markets rebound from the recent lows set in March, as progress combating the spread of the coronavirus gave hope to investors. The S&P 500 gained 12.82 percent during the month, marking the best single month for the index since 1987.

Month-over-month nominal sales in April decreased by 16.5% (16.45% to two decimal points). Real Retail Sales, calculated with the seasonally adjusted Consumer Price Index, decreased by 15.8% (15.78% to two decimal points).

The latest JOLTS report (Job Openings and Labor Turnover Summary), with data through March, is now available.

The Census Bureau's Advance Retail Sales Report for April was released this morning. Headline sales came in at -16.5% month-over-month to one decimal and was below the Investing.com forecast of -12.0%. Core sales (ex Autos) came in at -17.2% MoM (to two decimals).

In a new white paper, GMO Credit Opportunities Strategy co-PM Jeff Friedman looks at the Federal Reserve’s unprecedented actions in the corporate credit market amid the COVID-19 pandemic and highlights an area of the market where investors might capture attractive opportunities.

The Fama–French value factor, and value investing in general, has suffered an extraordinarily long 13.3 years of underperformance relative to the growth investing style. The current drawdown has been by far the longest as well as the largest since July 1963. Arnott, Harvey, Kalesnik, and Linnainmaa examine the potential causes of value’s underperformance and provide estimates of value’s performance relative to growth’s performance under different revaluation scenarios over the next decade.

We've updated our monthly workforce analysis to include Friday's Employment Report for April. The unemployment jumped to 14.7%, and the number of new nonfarm jobs (a relatively volatile number subject to extensive revisions) came in at -20.5M.

Russ explains why Chinese equities should still be a core holding.

The COVID-19 pandemic has changed how global consumers learn, shop, travel and work, as well as how they fulfill entertainment and health care needs. Franklin Equity Group’s John Remmert and Donald Huber share which trends they think are permanent and which are likely just a phase.

Key watchpoints for China as it emerges from the COVID-19 crisis.

The U.S. political focus has shifted to the reopening of the economy.

David Rogal and Bob Miller contend that the TIPS market dislocations witnessed in recent months have resulted in opportunities that investors would be remiss to ignore.

Here is a table showing the annualized change in Headline and Core CPI, not seasonally adjusted, for each of the past six months. Also included are the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components.

In this era of pandemic-induced market volatility, advisors are systematically searching for investment products that limit downside losses. They are willing to give up some upside potential to reduce their exposure to painful, black-swan events like we have seen. One of the product types designed to do this and that has benefited from strong asset flows is defined-outcome ETFs. Here today to talk about how those ETFs work is one of the principals from Innovator ETFs, the leading provider of defined-outcome ETFs.

Let's do some analysis of the Consumer Price Index, the best-known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U.

April was a strong month for the market with the S&P500 returning more than 12%. This came on the heels of an extremely volatile month that was March 2020 where the S&P500 corrected 12.50% when all was said and done. However, there was a ton of volatility to get there.

Investors are continuing to pour cash into gold exchange-traded funds, with 2020 inflows already exceeding any full year on record.

Let's take a closer look at Friday's employment report numbers on Full and Part-Time Employment.

It can be difficult to give a fair representation of each country’s market response to the COVID-19 outbreak. Each nation has varying initial conditions, population responses, and approaches to quarantines.

David Rosenberg bluntly told attendees Monday at John Mauldin’s Virtual Strategic Investment Conference 2020 that the stock rallies in recent weeks ignore reality and don’t recognize that the United States is likely entering a depression, facing double-digit unemployment for at least three years, secular changes in consumer spending and saving, and deflation followed by stagflation.

The headline number for April came in at 90.9, down 5.5 from the previous month. The index is at the 9th percentile in this series.

Some speculate they’re just starting the worst slump in years, spelling trouble for anyone late to the private-asset party.

The economic calendar is a normal one and is beginning to include data from after the start of the crisis. This week includes small business and consumer sentiment surveys, as well as April data for retail sales and industrial production. I will also be watching jobless claims, both new and continuing.

The First Eagle Overseas fund (SGOVX) has an exceptional 27-year history. Since its inception, it has returned 9.15% versus 4.03% for the MSCI EAFE index. It was originally managed by the legendary Jean-Marie Eveillard. I spoke with its current management team about how the fund has performed during the coronavirus crisis and why financial professionals should look to diversify outside the U.S. markets.

The recent market volatility has caused stress, fear and even panic. But that emotional toil can be alleviated by constructing what we call “dedicated portfolios,” rather than blindly following the precepts of modern portfolio theory.

As an advisor, you have protective instincts, so COVID-19 is likely to activate your emotions and push your thinking toward extremes. Your brain is probably searching the world for dangers and building a decidedly negative worldview. Psychologists call this catastrophizing: seeing the future in a negative light. This reduces your ability to sort available information.

With lower expected returns on the horizon, endowment managers are questioning whether standard annual spending rates will be sustainable and whether certain spending formulas are better suited for the muted environment investors face.

Leverage is probably one of the most controversial subjects in investing. Used properly (and given a bit of good fortune), the benefits of leverage can be amazing. Leverage is the reason why home ownership is often viewed as one of the best ways of building wealth.

Drawing on lessons learned from the credit crisis of 2007, here's how we're transitioning fixed income assets amid the coronavirus pandemic.

For more than a couple of months now, I’ve said that gold mining companies will have a strong first (and second) quarter thanks to higher metal prices. Stock prices, as you know, are largely driven by revenues and free cash flow (FCF).

COVID-19 and turbulence in the oil market have been reshaping daily life, economic fundamentals and market activity for weeks. Emerging markets, like the rest of the world, have been along for the ride.

Research Affiliates discusses how the All Asset portfolios seek to capitalize on opportunities amid pandemic-related market volatility and a strengthening U.S. dollar.

This commentary has been updated to include this morning's release of Nonfarm Employment. April's 20.5M decrease in total nonfarm payrolls had revisions that resulted in 214K fewer jobs than previously reported. The Investing.com consensus was for 22M jobs lost and the unemployment rate to increase to 16%.

The turmoil in the first quarter of 2020 reinforced the importance of rebalancing in target-date design. As we see it, a finely tuned, systematic approach can help keep emotions in check and risk under control—benefits that translate to many types of multi-asset solutions.

I hope this message finds you and those close to you in good health as we all navigate the fallout that happens when a health crisis spills over and triggers an economic crisis.

What’s your best guess about what happens next? Seesaw markets? V-shaped recovery? Further equity declines?

Join us at 2 p.m. ET Thursday, May 7 to hear about how convertible securities can help you prepare for multiple possible scenarios. At all times, convertibles are a strategic allocation that can provide added diversification to a portfolio. What’s intriguing investment professionals in this turbulent environment is how convertibles have historically helped manage the risk of equity investing.

Because they’ve provided comparable equity returns with less volatility, including convertibles in a portfolio can help keep clients invested.

Headlining our webcast panel will be Calamos Founder, Chairman, and Global Chief Investment Officer John P. Calamos, Sr., widely recognized as the pioneer of the convertible asset class. Joining John will be:

• Eli Pars, CFA, Co-CIO, Head of Alternative Strategies and Co-Head of Convertible Strategies,
  Senior Co-Portfolio Manager, including of Calamos Market Neutral Income Fund (CMNIX), the industry’s largest alternative fund (Morningstar data, 3/31/20)
• Joseph Wysocki, CFA, Senior Vice President, Co-Portfolio Manager, including of the
  Calamos Convertible Fund (CICVX)

Since he launched his technology-focused hedge fund in 2017, he has been running it from a home office.