Talking Points – April 2020

April 22, 2020 – The Most Important Investing Circle

Those of us that are sports fans are really missing games these days. We miss it so much we would even be willing to tolerate generic player interviews where they mention cliches such as, take it one game at a time and give 110%.

Investing is also well known for a lengthy list of cliches. Of course, there tends to be some truth in most of these sayings. In our opinion, none is more important than Don’t Fight the Fed

In less than two months, the Fed has provided more stimulus than they did did 80 weeks into the original quantitative easing started during the Great Financial Crisis. They are seemingly leaving no aspect of the financial markets untouched.

It can be confusing to see stocks rally so much over the past month with the health and economic situation the world is dealing with today. Markets won’t go up in a straight line, but betting against the Fed is a dangerous game that we advise to do carefully.

April 22, 2020 – Cash is King

We have long viewed cash as an asset. In fact, we continue to have available cash in most of our portfolios to try and take advantage of opportunities that might arise.

However, we couldn’t help but think from a contrarian perspective when Vanguard recently announced closure of their large money market mutual fund to new investors due to the massive inflows. There is also the chart below, showing institutional managers at the highest level of cash holdings since 9/11 despite a near 0% interest rate.

We certainly understand the desire to hold cash in the current environment. However, we also know that investors holding large cash levels often feel the pain of watching markets move higher. Eventually they might rush back into the market pushing it higher just as they rushed out of the market helping push it lower. It is always better to have a disciplined process to follow, rather than risk making emotional decisions.

April 15, 2020 – Quality is Winning

Perhaps the only investment factor we discuss more than behavioral aspects, is the importance of quality. The reality is that they are often intertwined.

Our chart today, shows that quality has been the strongest performer YTD and over the past 1-year. We would note that momentum, another favored factor, has also been strong.

Source: State Street

Coming off market lows, we know that high beta, low quality investments can have large surges higher. That certainly occurred on some recent days. We have to wonder how many investors that owned those stocks beforehand still owned them to enjoy the rebound. Quality not only tends to outperform through full market cycles, but its relatively lower volatility helps to lessen the emotional decisions investors make. 

Source: Greg Towner, CFA, CMT