Investor Commentary Q2 2020

And you may ask yourself: “Well, how did I get here?” –Talking Heads, “Once in a Lifetime”

An investor who fell asleep from New Year’s Eve to Independence Day, would awake wondering if they were still dreaming:

  • The S&P 500 and her portfolio values were almost unchanged from the end of 2019, which had capped a year of great returns.
  • Despite this, economic activity was moribund with shuttered shops, a vacationless summer and global economies in the sharpest recessions they had seen since the Great Depression.
  • There was massive social upheaval on the eve of a major General Election.
  • Socially, a strange reluctance for anyone to get near her as if she didn’t smell good.

But it was not a dream. Coming into the quarter, we executed on the plan we outlined in March and we began using the cash we generated to purchasing stocks, non dollar bonds and credit in our accounts. This took courage in the wake of the massive March selloff with predictions of worse to come.

Using our smart Beta framework, we targeted industry sectors best situated to capture the economic tailwinds: we lightened but maintained our focus on recessionary sectors (healthcare and utilities) and rotated towards consumer discretionary firms (mostly Amazon) and industrials along with a healthy dose of gold. All of these paid off as firms like Amazon capitalized on their position. Our industrials weighting did not begin to outperform until the end of the quarter.

In fixed income, we extended our average maturities and we took more credit risk as these had become extremely cheap. We also saw an impending dollar weakness and added non-dollar fixed income to profit. We were fortunate when the Fed unexpectedly started buying many of the same securities we owned which pushed our profits. We also added some structural reinforcement to your portfolios by adding Treasury duration and very cheap inflation protected Treasuries.

As a consequence, we were able to make up most if not all of the losses experienced during the Covid-19 SARS financial crisis.

In addition to trading, we looked at ways to position strategically in the face of the current calamity. Local and state budgets are strained, and as a consequence investors like us who are coming through this in good shape, might be asked to pay more taxes to spread the burden. To prepare for this, we did three things 

  • We re-ran your financial plan with higher tax assumptions. We have a few historical tax regimes programmed into the system so we were able to adjust. Roughly speaking we saw clients needing to work an additional two years to make up the lost value due to additional taxes they we expected they might have to pay. In case you did not know it, we have plans for all clients whether we have formally reviewed it with you or not. If you would like to see what we have got, just let us know!
  • We evaluated your potential to benefit from a Roth conversion. Unfortunately, the market turned around so fast, we were not able to get many of these launched.
  • We engineered a very complex rebalancing to 529 plan assets, an exercise not normally available in these plans.

Our focus is on gaining more in up markets than we lost in down markets. No market goes straight up so this ability to have “money on the table” when we win and less when we lose drives higher dollar balances for a given level of performance. In other words, you could have a higher account balance even posting a 0% return. This speaks to the quality of returns I emphasize to go with the ever-present quantity measurement of returns. This matters because we are in a volatile market that could easily sell off again.

As for the Covid market, it is important to remember that the economy isn’t broken in the ways it was following the recession of 2008, it was simply interrupted. The initial sell off, before anyone had locked down, was 32%. That was when everyone thought gridlock and the Fed would lead to no help from the government. This assumption was wrong. There was also a certain duration of viral course priced in which seems to have been overdone. What we are seeing right now is that we are making a tradeoff against health for the good of the economy. Fauci said we might have some vaccines by year end and, right or wrong, the closer we get to any kind of vaccine or reliable testing, the more stable things will become. Even if the virus spikes, we aren’t going back to full lock down as we did in March. It won’t be business as usual, and the market might be choppy, but remember that volatility can become an opportunity to build wealth.

Investors are focusing less on the impact of the virus on corporations and more on how the government will fulfill its role as the ultimate risk manager. Therefore, I think the market is rotating to the general election. The winner faces a novel economic problem: Covid prevention creates a physical barrier between suppliers and consumers and therefore, individuals will not resume full economic activity even if the restrictions are completely lifted. For example, on the supply side many will not want to go back into certain work settings. Still others --worried about uncertain income or having developed habits of doing more themselves -- will become comfortable with reduced consumption and travel. Ultimately full economic activity will only return when we solve the health problem. In this way good economic policy is good health policy.

Joe Biden’s wants to raise taxes, eliminate corporate tax breaks and impose more regulations. These would seem to be contrary to the interests of market participants. However, aggressive federal effort to corral the coronavirus might be the policy to unlock economic potential. Add in a favorable trade orientation and the fact that it would be hard for him to get a tax hike through Congress and one can see why the market might rally as Biden’s prospects improve.

While our time horizon is much longer than November 7, for long term investors, a “W”- shaped recovery in markets might present an opportunity to harvest rebalance profits and so with that in mind, I have been working to learn from the selloff earlier this year to increase our odds of success if the volatility resumes later this year due to a fall virus resurgence, election-related volatility and a subsequent market dip. Some would say, “why not sell to cash in the face of impending volatility”? Before selling, we should consider this fact: investors who sat in cash on the 5 biggest single day gains of 2019 posted a loss of 30% in the stock market compared to -4% for the index. This means that calling a peak or trough was a risky and potentially costly game. Investors focused on long-term wealth should remember that most are much wealthier being in the market when it goes down so they can capture the gains when it goes up A diverse portfolio that includes countervailing assets like Treasuries and gold serves us much better.

We continue our hard work using specialized tools and know how to protect and grow your wealth. Let us not forget that this too shall pass and let’s keep our eyes on the sky.

I welcome your comments, updates and inquiries. It is an honor to serve you.

Copyright 2020 Camelotta Advisors, All Rights Reserved. The commentary on this website reflects the personal opinions, viewpoints and analyses of the Camelotta Advisors employees providing such comments, and should not be regarded as a description of advisory services provided by Camelotta Advisors or performance returns of any Camelotta Advisors Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Camelotta Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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