As you may have seen recently, a Japanese amusement park asked patrons to stop screaming on roller coasters in an attempt to contain the spread of COVID-19. For me, I know that would be an impossibility since I scare easily, and so I was impressed when I watched the video of well-dressed riders barely reacting at all. While not an actual roller coaster, the markets have been quite a ride themselves this year with the MSCI World Index seeing a peak to trough drop of -31.82% in Q1, and an aggressive recovery up 38.22% through June 30th.
Last week we hosted a 2020 Mid-Year Market Review with Blaine Rollins, CFA, author of our popular 361 Weekly Research Briefing. We had several interesting questions come in from attendees so we thought we would use this week’s blog to share Blaine’s responses.
We recently asked readers of our popular market commentary, the Weekly Research Briefing, to submit market-related questions for author Blaine Rollins, CFA. We had several interesting questions come in so we thought we would use this week’s blog to share some of Blaine’s responses.
One of the most puzzling market-related stories to come from COVID-19 is the disconnect between the stock market and the economic numbers. The market would be much, much lower if it weren’t for the Federal Reserve’s actual and promised buying of credit assets (e.g., Treasuries, Investment Grade Bonds, BB junk bonds, auto loans, residential and commercial mortgages, credit card debt, etc). They have provided a floor to the markets that help companies raise money by selling bonds and to keep the foreclosure and repo man away from all the personal assets of people who just lost their jobs.
The beta of a stock or portfolio is a widely used measure of risk—capturing the sensitivity of the security to “market wide movements.” Regardless of the source of the movement of the market, this measure captures what the market and the security have in common. A security that has low beta is described as having low sensitivity to the market and vice versa.
In a recent blog, we addressed the opportunity of funding a long/short equity position from existing fixed income holdings given the less-than-optimistic outlook for that segment of the market. I certainly agree that holding an overweight to core fixed income, at current interest rates and credit spreads, just doesn’t provide the same attractive risk/return trade-off that investors have gotten used to over the last 10 (20? … 30?!) years. Today, we offer a second approach to funding a long/short equity position.
By the end of 2019, equity markets finished off an incredible decade with returns well above historical averages, and volatility well below them. Investors that had any kind of diversification or hedging in their portfolios were likely frustrated about lagging, long-only U.S. equities and may have gone either full beta or deployed ‘hedging strategies’ that had been performing well relative to the broader market (likely due to their higher beta). Now with the sharp decline that markets have experienced since February 19th, investors have perhaps been reminded why protecting capital on the downside is still so important.
In one of our recent posts, we discussed building portfolios that can handle the inevitable ups and downs that investors experience in the markets. Today we will discuss an important step in that process, namely, understanding the current market environment and setting go-forward expectations.
Like many of my co-workers, I listen to a lot of podcasts in my spare time. This one struck me as particularly interesting—so I thought I would recommend it.
Tesla has been the Excalibur sword that active investors needed to fight the growing passive industry over the last four months. With the stock excluded from most indexes due to lack of profitability and float limitations, it has been one of the big market cap names that active investors could invest in for outperformance. While an investment in Tesla was problematic for active investors from 2014 thru 2019, the electric car maker has shifted gears in the last few months with over-weighted owners now rejoicing. Recent momentum in the name has lifted the stock 250% since October.
After starting her career as an advisor, Andrea has been helping advisors implement financial products and strategies into their portfolios for more than a decade. Andrea is a CAIA charterholder and is well-versed in implementing and explaining alternative strategies.
Past returns do not guarantee future results.
The views expressed are those of the author at the time created. These views are subject to change at any time based on market and other conditions, and 361 Capital disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any 361 Capital portfolio.
This 361 Capital blog is not intended to provide investment advice. This blog should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by 361 Capital or any third-party. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.
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After starting her career as an advisor, Andrea has been helping advisors implement financial products and strategies into their portfolios for more than a decade. Andrea is a CAIA charterholder and is well-versed in implementing and explaining alternative strategies.