Cash is King!
Dear Clients:
Good evening! Hope all is well with you and your families.
This is indeed an unprecedented moment of crisis for the heath (and much less importantly, wealth) of our world’s nations.
Since most of you may be taking some personal time off and/or at least working from home and given the recent extraordinary equity sell-off, I thought it would be prudent to provide a quick update over how our portfolios have performed since the first week of March. The last time we wrote this letter on March 5, we had consciously made the decision (on February 26) to exit equities and invest in bonds and gold. In hindsight, cash would have performed better than either bonds or gold. Over the past two weeks, there was simply a fire-sale of all asset classes, including that of the bonds with the repo market being broken temporarily until the New York Fed stepped in to inject billions in capital. Indeed, we lost some ground, losing about another 2 to 2.5% before recovering, as our models had indicated a flight to safety to bonds and gold. Gold continued its decline and we then sold off our positions at stop losses.
Today alone (3/16/2020), equities fell by a record 12%, while our portfolios returned +2.2%, thanks to our bond allocations (and for some portfolios, VIX futures) that remain in the portfolio. Year-to-date, the S&P 500 has returned a -26%, while our portfolios have returned in the area of -4 to -5% (to slightly positive in accounts where we were allowed to short, depending on the client risk profile). Some of you also expressed concerns to me over the weekend about staying away from the stock market too long (perhaps based on Friday’s last half-hour run-up of 9+%). However, our experience indicates that these sell-off periods do have temporary respites/come-backs until the current uncertainty levels of the economic conditions clear up world-wide.
While futures indicate that tomorrow (3/17/2020) promises to be an up-day for the markets, we believe that we are not at that point of entry back into equities yet and there may be another leg down. To put things in perspective, the S&P 500 has now reached a level of 2300, where we were perhaps around March 2018, before the late 2018 sell-off began and the 34+% run-up in 2019 ensured. The return from stocks has been unprecedented since the last recession in 2008-9, up 270% since the bottom in February 2009. Our current economic scenarios, suggested by the ongoing crisis, do not sound healthy enough to step into equities, despite the Fed’s recent steps. At best, our US macroeconomic model indicates a mild recession to begin in 2Q2020, (even under the most lenient assumptions of non-farm payroll declines, higher unemployment, fewer adjusted hours and low levels (0% to 0.25%) of Fed Funds rate.
Please feel free to reach out to us if you have any questions. As always, thanks for your trust and staying invested with us!
Safe “social distancing”.
Best regards,
Sri Nagarajan
Managing Partner