The stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market’s dramatic rebound from its precipitous drop as coronavirus fears mounted have had some pundits calling this a “new bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years..” Chief Investment Officer Jim Lowell discussed how to approach stocks’ rapid recovery our recent quarterly webinar*: Separating Pandemic Noise From Investment Signals.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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Jim Lowell: Those who say we’re in the stage of the next bull market are quite literally putting the bull before the horns. We suspect there’ll be many more difficult tests, not just societal tests, but socioeconomic tests as we wander our way through to what hopefully will be this time next year, a vaccine that’s relevant and on scale.
Between now and then, we suspect we’ll see increased volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. in the market. And in fact, heading into 2020, we already expected to see greater volatility, not forgetting we were looking at a China trade war, Brexit, impeachment, as well as a typically extra-volatile year given that it’s an election year. So we’d already provided some bolsters, buffers inside of the majority of our portfolios to deal with what we thought would be sort of nominal volatility along similar patterns.
We certainly were not expecting to see either a virus sweep the globe or that self-same virus effectively cut the knees out from underneath the global economy, the global markets. But we’re already, at least in this particular instance, on a partial rebound and we suspect that the pattern that plays itself out will be one of rebounds and retreats unless and until the medical data gives us a more sustained trajectory of more than mere hope.
There’s also the massive Fed stimulus. And of course, not just the Fed here in the U.S. but their global equivalents riding to the global economy’s rescue in a way that we have, I don’t think seen done in terms of the quantity and quality of remedies. And we are not going to see them abate. There is the sense that it’s almost an infinite stimulus which hopes to outlast but has been a vicious virus.
We don’t know whether the bottom has been reached or has not, but it certainly wouldn’t surprise me to see the lows retested. I wouldn’t want anyone to think that we think that we could put our feet up on our desk from here through the end of the year. In fact, we think the end of the year, given that that will be a recurring moment when viruses tend to begin to wend their way back into the population, will be a fairly difficult patch, not just the current patch that we’re weathering.
The game plan in terms of whether or not it includes going to cash? We in fact did something that we have done rarely, but in past dramatic moments, we have done. And we did raise a little bit of cash across the boards of most portfolios for two reasons. Simultaneously, we also added to one of our defensive stock-pickers. We wanted that cash to help offset not just the volatility in the stock market, but also the volatility in the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market. And also to give us some dry powder to be able to pursue opportunities.
*Webinar recorded after the market closed on Wednesday, April 22, 2020.
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