The first quarter of 2020 has been one for the record books, as investors witnessed the fastest bear market in history, the price of oil (WTI) falling over 66% to a 17-year low, US Treasuries considered a safe haven experienced volatility not seen since 2008, leading to $257bn in bond redemptions. With a recession imminent, a perfect-storm scenario has played-out resulting in non-correlated assets sustaining the most damage in investor portfolios. In this month’s issue of The Samra Report we address Fed intervention, and how to position your portfolio in Q2, as well as the likely outcome in the aftermath of the coronavirus.
The Fed’s stimulus package, although provides a proverbial steroid to the nation’s largest corporations, does little to provide assistance to approximately 157 million working, tax paying, Americans.
“Coronavirus has pushed the global economy into a recession of historic proportions and halted the longest-lasting equity bull market on record.” The global pandemic has caused an adjustment in consumer behavior, a drastic decline in corporate spending and hiring, and unemployment claims surging 3 million to 4%. The White House believes we are likely to see unemployment by year-end reach 7.4%, while Goldman Sachs predicts unemployment soaring to 15% by mid-year, up from a previous forecast of 9%. Although Wall Street’s finest were ill prepared for a systemic shock of this nature, Mike Wilson, Chief Investment Officer at Morgan Stanley believes the worst is likely behind us, as markets have likely priced-in fears of a recession, recommending investors look towards equities, a sentiment we do not share. At Samra Wealth Management, we believe it is important to outline the correlation between a portfolio managers compensation with the net assets they manage. Furthermore, we believe there exist two factors undermined by economist:
The Fed’s stimulus package, although provides a proverbial steroid to the nation’s largest corporations, does little to provide assistance to approximately 157 million working, tax paying, Americans. The Government has in the past used similar measures of trickle-down economics to stimulate the economy, to a smaller scale, back in 2008. Although financial markets thrived on cheap money, the benefit to working Americans was less uniform geographically. According to the Center for Disease Control (CDC), the peak spread of the virus forecasts mid-April, suggesting measures to restrict commerce continue until the end of April. Unfortunately, the governments “Big Bazooka” does not provide enough income to sustain the nation’s Gross Domestic Income (GDI), and in an economy where consumption equates for 68% of the nation’s GDP, this is a problem. Goldman Sachs believes we could see GDP slump as much as 34% in 2020.
Provisions of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provide for investors to withdraw funds from retirement accounts without a 10% penalty. Although additional provisions allow for investors to delay their 2020 RMD’s, we believe investors are likely to tap into their retirement accounts as their “emergency funds” or reserves deplete. Selling securities at a low, to create liquidity is something hedge funds and highly leveraged portfolio managers have been required to do as their clients attempt to mitigate downside exposure. In reality, this methodology of selling low allows clients to lock-in their losses.
Modern Portfolio Theory and the efficient frontier by Dr. Harry Markowitz “demonstrated that a diversified portfolio is less volatile than the total sum of its individual parts, while each asset itself might be quite volatile, the volatility of the entire portfolio can actually be quite low.” Investment firms have utilized this model by blindly adding to their client’s portfolios non-correlating assets, such as real estate, commodities and hedge funds. In our July 2016 edition of The Samra Report, we stated “Investors should be cautious, specifically those with a flawed understanding of Modern Portfolio Theory.” It is not just the inclusion of Alternative Assets; however, assets must be selected at the best attainable prices. Q1 2020 witnessed real estate, credit and commodities including oil and gold, known as safe havens, punished, falling as much as 66% from recent highs. These firms include some of Wall Street’s best-known private equity and private real estate firms such as Blackstone, KKR and Apollo Global Management.
Investors able to stomach the rollercoaster ride may stand to generate the greatest tax-efficient returns, utilizing income optimization strategies such as Roth conversions.
At Samra Wealth Management, we continue to manage assets in-line with our sector rotational philosophy with regards to strategy, and although our clients are sitting in the highest cash positions since our inception, tactical investing has played a larger role, helping to mitigate downside exposure. “Only the history books provide insight into when a bull market ends,” or in this case when the market bottoms-out. Our tactical philosophy has evolved to searching for fundamentally strong corporations, as well as firms essential to our nation’s defense and longevity. Recent declines in market value caused by recessionary fears and fund outflows, caused companies such as Boeing to rebound over 50% within a few days, allowing our clients to capitalize while mitigating risk due to less time exposure in the market. It is our belief equities will remain volatile over the coming months, and we expect to allocate cash back into equities and into private real estate and private credit opportunities’ as a rush to liquidation has in some cases caused these assets to be sold while greatly discounted, in mid-May. In addition, we expect to see a rising number of companies downgraded this year, companies that are fundamentally strong with a rich history, these downgrades are likely to present a buying opportunity in the fixed-income space. For those holding cash, we believe structured notes and market-linked CD’s provide the greatest level of protection while allowing investors exposure to the market.
Investors questioning how to allocate their portfolios amongst this near perfect storm, our guidance is to be cautiously optimistic. The Fed’s stimulus bill is likely to provide an ideal environment for equities to thrive in, however, amongst the collateral damage we expect to see consolidation in the energy and tourism industries. We further expect Q2 to be plagued with volatility, however, those investors able to stomach the rollercoaster ride may stand to generate the greatest tax-efficient returns, utilizing income optimization strategies such as Roth conversions.
Disclosure: Investment Advisory Services are offered through Samra Wealth Management, a Member of Advisory Services Network, LLC. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor. Investing involves risk including loss of principal.
Structured Products are sold only by prospectus. A Market Linked Trust is complex and is not suitable for all investors. Investors should read the prospectus and pricing supplement carefully before investing which contains a detailed explanation of the risks, tax treatment, and other relevant information about the investment. Investors should consult their accounting, legal, or tax advisor.
Market-Linked CDs are made available through an offering document, or disclosure statement. These documents contain a detailed explanation of the risks, tax treatment, and other relevant information about the investment. Before investing, you should read the disclosure statement and other supporting documents carefully. Additionally, investors should consult their accounting, legal or tax advisors before investing. Market-Linked CDs are sold through financial professionals and are not suitable for all investors.
It is important to highlight that Market-Linked CDs only guarantee principal back at maturity (subject to the credit risk of the issuer) and thus if an investor sells or redeems his/her investment prior to maturity, the investor may receive an amount less than his/her original investment. There may be substantial penalties for an early withdrawal. Typically, the issuer of the MLCD maintains a secondary market; however, they are not obligated to do so.
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