We hope that first and foremost, everyone continues to stay safe out there, and know that you are in our thoughts. Market Volatility is still extremely high. The daily price swings we saw in March are some of the highest in history. We’ve spent a lot of time over the past few weeks analyzing data. We looked back at the 10-worst daily returns for the market going back to 1929. The 10 worst daily returns since the late 1920’s are dominated by the Great Depression, 1987, the Great Financial Crisis in 2008 and March 2020. 2 of the worst 6 days ever have come in the past couple weeks.

We’ve also seen some of the best trading days. Dow had it’s best 3-day run since 1931. Volatility is unprecedented, but the speed in these markets is unprecedented as well. The Feb- Mar 30% selloff was the fastest 30% drawdown in history. It took only 22 trading days. Just edged out the previous record from 1934 of 23 days.

Since the near-term bottom on 3/23 – we’ve bounced 16% from the lows, which is good news. Defensive sectors and factors leading us higher, which is good for our positioning, but not a sign of a new sustainable rally taking hold. Utilities up 24%, Real Estate up 22% along with some short covering in Energy up 22%. The Low-volatility and momentum (which is currently overweight to low-vol) Factors leading us higher as well. SP 500 YTD down 20%, led lower by cyclical stocks Energy -51%, Financials – 32%, and Industrials -27%. For now we’re preaching patience.

Economy:
The economic fallout from Covid-19 is still not yet fully understood. We’ve really only seen 1 economic data point that syncs with the virus real-time. That was last Thursday’s jobless claims that printed at 3.3M!!! 5X the previous historical high for a given week. We’re hearing forecasts of drops in GDP as high as 25-30%, and unemployment rate rising to 15-20% or worse, which are depression-era numbers. To be clear – we’re not calling for that here now.

There is an abundance of tools available, which were not around in the 1930’s. We are encouraged by the speed and to the degree that central banks, including the Fed, and governments around the globe have reacted with stimulus measures. And there may be more coming.

We don’t share this data to scaremonger, but to reinforce our stance that it remains prudent to wait and watch.

Rely on our process and let things play out. Bear markets, especially those that accompany the end of a cycle fully loaded with unemployment, profit and debt cycles, take longer than a month. They require time and space to get resolved. All the stimulus that has been released globally will unleash a mother of a bull market, once we come out of this, but we’re not there yet.

Positioning:
Going to maintain our cautious approach and not chase. Be reliant on our market signals and our process. We are not putting much new capital to work. We’ve used the bounce to lighten up and raise more cash. We have made some changes on the margin around positioning, but nothing aggressive.

Update on some signals we’re watching –

Treasury volatility has come down significantly with Fed intervention.
Volatility signals – VIX for equity market – from 85 to 53. Really coming in, but still highly elevated
HY spreads have come down from their peak at 1100 to ~900
Factor stabilization and evidence of high beta and momentum turns
Peak and decline in the infection rate – some green chutes in Europe; globally infections are growingm10% day over day

Wrap up:
We know it’s an emotionally charged time. There’s a lot of fear about the unknown, especially on down days and FOMO (fear of missing out) on bounces. Bear markets take time and space. We don’t know where the bottom is, we don’t know how long it will last. That’s why we’ve built our process the way we have; we focus on data so we can keep emotions out of it. We are confident in our process and we’re confident in our game plan and on execution. We will remain vigilant as we wait and watch for the turn, and stand ready to take advantage.

Sources: FactSet and Bloomberg

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