Last Updated on 15 October 2020 by F.R.Costa
With losses accumulating between 20% to 30% in most markets, many ask whether this is the time to go all in. I believe it is not. Volatility will remain high for some time, as the number of corona virus cases is still rising.
Donald Trump opted for playing down the effect of the new corona virus in the US economy. Investors didn’t follow and brought the Dow Jones Industrial Average down from a level of 28,256, at the end of 2019, to an intraday low of 18,213 on 23 March – a 35.5% decline.
It took the market just 19 sessions to enter in bear market territory. This compares with near 180 sessions during the financial crisis of 2007-2009. Certainly, the situations are different because we currently live an event-driven decline while in 2007-2009 there was a full-blown crisis with cyclical factors at play. Still, we don’t know for sure whether this event-driven situation will resolve or turn into a full blown crisis. For that reason, I prefer to skip a contrarian bet on the market, in particular after 11 years of economic expansion.
Between Fear And Greed
The market is always a game between fear and greed. Most people sell when the market goes down and buys when the market goes up. We fear when we see the market going down 10% in a day or being stopped by a circuit breaker. By analogy, we are always tempted to get a share on a bull party, thus buying when prices are already rising. As a short-term strategy this is often poor. With the Dow down 24% since its peak on 12 February, many are thinking about opposing the trend and betting on the recovery. In my view, that’s a very good strategy for long-term investors. Buying equities on substantial dips is always a good long-term strategy. But for those with a shorter-term goal, this is eventually still not the best time for a full entry.
In a matter of just a few days, the US turned into the new epicentre for covid-19. Currently, there are 86,500 known cases in the country. Italy has 80,500 reported cases and China 81,300. The situation changes dramatically in a matter of days. The latest jobless claims figure surged from 282,000 to 3.3 million. Not even during the financial crisis, there was a week with an increase in jobless claims like this. In fact the record level increase was 695,000 prior to this reported outlier. Part of the world is under a lockdown and we don’t know what’s going to happen when normality is restored. There’s a big risk the world enters recession.
So far, central banks pledged to support the market with massive asset purchase programmes and interest rate cuts. The US government has just approved a fiscal package worth more than $2 trillion. Other governments around the world will follow. All these measures represent a positive step but are eventually not enough. While the virus spreads and people is under a lockdown business activity will remain low. Of course some businesses like Netflix may benefit from a lockdown, as we spend more time at home. But for most, there’s a big loss. Many small businesses, in particular in Europe will go out of business. But there’s no alternative, as ignoring the virus would just accelerate its spread and lead to chaos. I believe no one in the world would follow that strategy for long, not even Brazil.
Some Alternatives To Invest
With all of the above in mind, I believe the best strategy is not to buy the full market. There are some good alternatives that I prefer. An example is the Amplify BlackSwan ETF (NYSEARCA:SWAN). Swan invests 90% of its funds in US Treasuries and 10% in S&P 500 LEAP options, in the form of in-the-money calls. This ETF offers downside protection for these turbulent times while still benefiting from any upside through the options component. SWAN has been hit by the current crisis but much less than the full market. Since its inception in November 2018, it has been outperforming the S&P 500. Its expense ratio is 0.49%, meaning you pay $49 in fees for each $10,000 invested, per year.
Other good option is to invest in gold. With central banks flooding the world with money and most government yields now negative, the opportunity cost of holding gold is low while it offers protection for inflation. Some good options are the SPDR Gold MiniShares Trust (NYSEARCA:GLDM) and iShares Gold Trust (NYSEARCA:IAU), as these enjoy low fees and have very high daily volumes. For a more detailed view on gold, you may check my monthly column at the Master Investor Magazine March 2020 Issue 60 p.36-43. Thanks all and stay safe!
For all this, I believe markets are going up and down, with bear traders winning most of the time.