Our clients, and investors broadly, have been asking this important question: How do we reconcile the recent stock market gains, particularly in the United States, with the uncertain outlook regarding COVID-19? In this article, we discuss the variables that impact investor behavior and provide context for why financial markets can rally in the face of negative news.LGPS-Why-Is-the-Market-Still-Going-Up-When-Covid-Risks-Remain
Our clients, and investors broadly, have been asking this important question: How do we reconcile the recent stock market gains, particularly in the United States, with the poor state of the current economy? In this article, we discuss the variables that impact investor behavior and provide context for why financial markets can rally in the face of negative news.LGPS-Why-is-the-Market-Going-Up-When-Economic-News-Looks-Grim
Listen to a replay of our first quarter 2020 Litman Gregory research team webinar. Topics covered (among others): U.S. stock valuations, managed futures, munis vs. taxable bonds, REITs, the tsunami of federal spending.
View and download the presentation slides here:Litman-Gregory-Q1-2020-Research-Webinar-Presentation-Slides
As we all know from news headlines, global stock markets have now entered a “bear” market, having declined more than 20% from recent highs. In Litman Gregory’s 30-plus years, we’ve been through several crises and stock market declines.OvercomingPanicInVolatileMarkets_LGPS
We are all now living through a period in history none of us will ever forget. The impact on our families, communities, and country has been profound. Remember that we will get through this crisis period. Things will improve and recover. This too shall pass.Litman-Gregory-First-Quarter-2020-Investment-Commentary
The global stock markets have been highly volatile. With a backdrop of a continued price war on oil and uncertainty about the economic impact of the global spread of the coronavirus, stocks fell into bear market territory the week of March 9. They have since fallen further.
We recognize that all this is highly unnerving and even frightening for clients. We further acknowledge that the full economic and medical effects of the virus outbreak are unknowns. We share your and your clients’ concerns about loved ones and our broader communities as we grapple with this health emergency. However, what we do know is that panicked investing is never a good strategy.
Part of Litman Gregory’s investment discipline is to use our long-term orientation to clients’ advantage by looking out beyond the near-term fear to rationally assess fundamentals and valuations. One of our core strategies is to take advantage of market dislocations. When there is a highly compelling case, we are prepared to act by adding back to risk assets like stocks when they are cheap and unloved. This is one of the hardest actions to take as an investor—to “be greedy when others are fearful.” But by acting with informed conviction, we believe we can add long-term value to client portfolios.
As you may know, we have been conservatively positioned with lower allocations to U.S. stocks and higher allocations to fixed-income and diversifying alternative strategies. In recent weeks we’ve seen the benefits of these latter holdings, as they’ve held up compared to stock markets, or even appreciated.
Following the more than 20% selloff in U.S. stock markets, however, our five-year forward-looking return estimates improved. We took advantage of the decline to modestly increase the exposure to U.S. stocks in our balanced portfolios by 2% to 4%, depending on the portfolio. We believe this shift improves the long-term return potential of the portfolios without meaningfully impacting their risk profile. After these trades, we remain moderately underweight to U.S. stocks.
As valuation-based investors, we view large price declines as opportunities to add back to stocks at attractive prices. If the selloff continues—and clearly it could—while it may be uncomfortable, we will be assessing whether it makes sense to further increase our portfolio allocations to stocks (by another similar increment), which we believe can pay off handsomely for investors who stick to their discipline through volatile market environments.
Again, we understand that significant market volatility—in this case combined with a scary real-world health threat—naturally elicits questions and emotions. Our team is here and available to talk through any questions or concerns you have.
The Litman Gregory Investment Team
Note: These materials are intended for the use of investment professionals only and may contain information that is not suitable for all investors. This presentation is provided by Litman Gregory Asset Management, LLC (“Litman Gregory”) for informational purposes only and no statement is to be construed as a solicitation or offer to buy or sell a security, or the rendering of personalized investment advice. There is no agreement or understanding that Litman Gregory will provide individual advice to any investor or advisory client in receipt of this document. Certain information constitutes “forward-looking statements” and due to various risks and uncertainties actual events or results may differ from those projected. Some information contained in this report may be derived from sources that we believe to be reliable; however, we do not guarantee the accuracy or timeliness of such information. Past performance may not be indicative of future results and there can be no assurance the views and opinions expressed herein will come to pass. Investing involves risk, including the potential loss of principal. Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products. A complete list of LGAM’s investment recommendations for the prior 12 months is available upon written request. For additional information about Litman Gregory, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website (adviserinfo.sec.gov) and may otherwise be made available upon written request.