Investment Update February 28, 2020
We know this is an uneasy time for all investors so we would like to follow-up on our Tuesday Investment Update to help alleviate any concerns you may have regarding your portfolios. The Dow Jones Industrial Average closed the day at 25,766, down more than 1,191 points or minus 4.42% for the day. As we noted in our January 29th update, our analysis reflected a retreat from the market highs to the 27,850 area that was achieved on Monday, with a secondary downside target in the 26,900 area which was also reached this week. We felt the markets were looking for a catalyst for a pullback and the Coronavirus provided one.
The breakdown in the markets Wednesday and Thursday has propelled the markets from a short-term break to a medium-term break. The long-term trend remains positive – for now. While we would welcome a “bounce” on Friday , we are not sure that traders will want to hold securities over the weekend.
We believe in the U.S. economy and the proven strength of corporate America to rebound, just as it has many times before. The question for the markets is: Will this “economic event” turn a strong economy towards recession? Keep in mind, even in a recession there are many investments that can aid a portfolio in difficult economic times.
We think that this is an event-driven sell-off. While the Coronavirus is at early stages in both health related and economic tolls, it will run its course and be a part of history. Just as our nation and our markets have recovered from disease, war, oil embargos and much more over the last century, so too will the markets recover from this. This crisis will run its course and have an endpoint.
The foundation of our economy is strong the present time. With concern for the human suffering, we would like to address the economic impact on our portfolios. While still in the early stages of this health crisis, the uncertainty remains about how long the reduction of economic activity will last. Earnings for this current quarter will be deeply affected but the longer term impact remains unknown. As mentioned many times before, the markets usually react better to known bad news than to uncertainty. Our experience in managing portfolios through many events over decades leads us to be patient, work with the tools we have and manage through to better times.
As recently as the fourth quarter of 2018 which was the worst December for the markets since the Great Depression, the Dow dropped over 5,000 points, almost 20% of its value. Within seven months it had reached new highs again. As mentioned above, the market decline below our target of 26,900 creates a break in the short-term trend and a mid-term decline in market direction. Our next target is 24,700 and our bottom target is in the area of 23,550. This would represent a 20% decline from the market high earlier in February. We do emphasize that our “targets” are simply research points that if attained will provide additional information on market sentiment.
Affinity Capital Portfolios:
Affinity Capital consistently maintains well-diversified portfolios. While the Dow closed down 4.42%, the Nasdaq was down 4.61% and the S&P 500 was down 4.42%, our combined client base was down an average of 2.65%.
There will be a large number of trades in the portfolios today as we have responded to the market transition from short-term to mid-term negativity. We reiterate that the long-term market trend remains positive for now.
- Many positions in our portfolios have been rebalanced today. This means we have added to what we anticipate to be temporarily weak positions and trimmed stronger positions to protect profits
- This sell-off has provided an opportunity to replace some of investment tools. For instance you may see a sell in a mid-cap fund in order to buy another mid-cap fund. The purpose is to increase the overall long-term efficiency of the portfolio. We may maintain the same allocation to an area of the market but we have another security that may have lower internal expenses or a slightly different but favorable approach to achieve the same goal.
- We have reduced our international exposure, especially to emerging markets. This is where uncertainty is the greatest and while there may be significant opportunities at some point, we feel the U.S. markets provide a better current opportunity
- We have opinions regarding market target levels but predicting a hard bottom is impractical, so we rebalance and add to some equity positions during a decline. Rather than go to cash, we have increased our bond allocations to over 20%. We will continue to both rebalance and draw from our bond funds to ease further into equities as a clearer picture emerges.
- We have increased our portfolio weighting in REIT’s – Real Estate Investment Trusts and we have also added a position in Gold fund. Our interest in gold predated this selloff due to the declining interest rate environment. We do believe that the Fed will lower interest rates at their next meeting March 17th & 18th. The yield on treasury bonds is an important economic indicator.
We at Affinity Capital hope this update has provided some insight into the care and responsibility we feel when serving your financial needs.
We are always available to visit should you have any questions.