It’s an ill wind that blows nobody any good

As protests and riots make 2020 an even more gravely difficult year, I think many of us are astounded by the reaction the stock market has had.  If someone had put you in a time capsule on the first of November 2019 when the S&P 500 was at 3,060 and blasted you to June 1st, 2020 and explained that:

  1. We are in the midst of a global pandemic.
  2. Policy makers shut our economy down for our own safety and the health of our people.
  3. Unemployment is expected to be close to 20%.
  4. The global economy will contract this year, even close to depression levels in some cases.
  5. And, we are enduring 1968 levels of protests, social unrest, and riots in the streets of every major city in the country.

What would your guess of the level the S&P would be trading at?  I doubt anyone who is a student of the markets would think the market could endure all those exogenous shocks without reeling lower (which it did) and sustaining protracted losses (thus far it hasn’t).  To put a point on it, the Dow Jones Industrial Average hit 1,000 in 1966 for the first time.  The United States was already embroiled in the Vietnam War, there were cracks in the fiber of society that led to massive protest around both race in America and the nature of war itself.  Without going into all the details, which many of us have studied extensively in college and beyond, it was a very difficult time for our country.  By the time 1968 came around, things took an even worse turn with the assasination of Martin Luther King and Robert F. Kennedy, which set off massive protests across the country.  Yet while there was certainly volatility in the stock market, after a difficult latter half of 1966, the Dow did pretty well in 1967 and 1968, even with the backdrop of the turmoil.  Ultimately there were a number of problems that made the 1970’s one of the worst decades for equity investors- Vietnam, Nixon’s resignation, oil shocks, hyper-inflation- and the Dow Jones didn’t see 1,000 again until 1982.  This is not to be predictive, because nobody knows what the next several years will bring, let alone the next few quarters, but it’s an ill wind that blows nobody any good.  As investors, we need to look beyond the headlines and the noise and figure out where the opportunities are.  Indeed as a citizen I am heart-broken by many of the tragedies unfolding, however as an investor my goal is to find the best place to place assets.  

So which way is the wind blowing and how can it blow us some good?

I looked at the dashboard of PortfolioWise to see which way the wind does seem to be blowing:

A quick check shows me that high grade bonds, both US Treasury and Corporate bonds still overwhelmingly have strong ratings (57% and 55% respectively have bullish or very bullish ratings).  Also HealthCare remains a strong candidate for opportunity (XLV), and particularly within Biotech and HealthCare Services.  Given the economic and now social turmoil, it stands to reason that safer areas of the bond market make sense in a portfolio, and we are clearly living through a period that highlights the need for health care.  As we like to say, the model aligns with the market, as there are the areas of leadership and fundamentally look strongest.

Taking a deeper look into the bond markets, I did a screen in PortfolioWise by utilizing the the ETF screener, focusing on top rating funds within their groups and ones with high liquidity and larger assets.

The search narrowed down 2,252 rated bond funds to eight compelling possibilities for further research.  I could further narrow my choices by only looking at low expense ratio ETFs, which would drop it down to four of them above.  Lastly, I could look for a higher yielding fund, and ultimately find a good fit.  

Our investment approach includes trend following, as I’ve written before “don’t fight the tape”.  The winds may be blowing bad outcomes for many people, but if you work at your process and have the platforms to help you, the winds can blow some good in your direction.

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