I believe we will be in a more
protracted economic hibernation than seemed likely just two weeks ago. I
outline my understanding of “Virus Time” in the link below on Three Scenarios.
With this extended timeline, it may
make sense for some subscribers to reduce the aggressiveness of their accounts
while we move through the early parts of the slowdown, even if we have not
reached the end of Upleg A as I describe below.
This note discusses:
- Where we
are in the “W-shaped” market recovery pattern
- A review
of recent model portfolio performance compared to the DJIA and funds
offered by Vanguard and the Russell Investment Group.
- Additional
research notes. These are not
required reading but will give you an idea of things I have been working
on. These include notes about three
different economic scenarios, a brief comment about responding to
rapidly appearing signals outside of our regular weekly trading pattern,
and a few additional points about valuation changes in past declines.
The W-shaped Market Recovery
Pattern
In my earlier note (https://marketresilience.blogspot.com/2020/03/update-march-22-2020.html)
I described the W-shaped pattern as the most likely. I continue to
believe that is the case. I believe we have already experienced the first
bottom of the W and are now in “Upleg A” mentioned in the earlier post.
It appears that Upleg A may continue for a few more weeks. However, the
DJIA may move down toward the level of the first bottom before it ends higher -
the path is not always higher each week. The second bottom is likely to occur
May through July; this is the buying opportunity you should take advantage of.
Below are recommended steps for
moving through these points in the W-shaped recovery pattern. These steps
are most applicable for people with investment time horizons less than, say, 7
years. For people with longer investment horizons staying with your original
model portfolio is reasonable through all these steps:
- First
Market Bottom – If tolerable, move to the target weights of
your selected model portfolios. DONE: The alert about the first bottom was
issued on March 25.
- At
the End of Upleg A – This occurs at the middle peak in the W.
When this time comes, consider reducing aggressiveness of your account by
increasing the amount of cash in your account (increase the amount in Box
#2 on the Shares-to-Trade worksheet), or switch to a model portfolio to
the left of the one you have been using. See (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html)
for more information on changing aggressiveness.
- We
are currently prior to the end of Upleg A. Based on the likely
scenario I link below, our period of high economic uncertainty and damage
will continue for several months. Bad upcoming mortality and economic
headlines will probably dampen the relief rally over the coming weeks.
This makes identifying the precise end of Upleg A more difficult. If the
uncertainty and variability of the current situation are intolerable, you
can reduce the aggressiveness of your account and still have time to move
to a more aggressive stance as the markets and economy emerge from hibernation.
Of course, you are free to use any model portfolio on the publication at
any time.
- I
will still try to identify the end of the relief rally as described
above.
- Second
Bottom – At this point switch back to your original model
portfolio and/or reduce cash in your account to resume the original level
of aggressiveness of your account. This is the buying opportunity you
don't want to miss. When we get to this time, you may see that moving to a model
portfolio that is more aggressive than the one you used during the decline
is appropriate.
Recent Model Portfolio
Performance
The link below shows how popular
Focused 15 Investing model portfolios performed over various recent time
periods. The tables show that even though the declines were significant, the
Focused 15 approach still performed favorably compared to the alternatives listed. https://marketresilience.blogspot.com/2020/03/update-march-26-2020-not-urgent.html.
Ongoing Research
This section is not required reading, but some subscribers might be interested in these comments. As an exercise, I am evaluating
three different scenarios for the path ahead to determine what, if any, changes might be
needed in our model portfolios to take advantage of them. https://marketresilience.blogspot.com/2020/03/covid-recovery-model-portfolio.html
I am also evaluating how I can
reliably provide alerts that a change in the aggressiveness of your account
may be appropriate. I will discuss this more in a few weeks.
Finally, here is a link to additional
information on changes in valuation measures in past declines. This adds more depth than I was able to provide in my comment on valuation a few weeks ago. https://marketresilience.blogspot.com/2020/03/historical-valuation-comparisons.html
Please feel free to contact me with
questions or comments.
Jeff
