Jim Stack: Market Historian on Stocks

03/20/2020 5:00 am EST

Focus: STRATEGIES

James Stack

Founder, InvesTech Research

When it comes to assessing the long-term investment climate there are few experts whose advise is more sought after than Jim Stack, money manager editor of InvesTech Research.

We have seen a lot of bear markets unfold over the past 40 years, but this one is unique in several aspects:

1) First, the trigger came from an external event (coronavirus) that is totally unrelated to monetary policy. In fact, the Fed has been aggressively “supporting” the market since its policy reversal in December 2018.

2) Second, there were virtually no confirmation flags of a probable or imminent recession. Instead, consumer confidence was holding near 50-year highs, and the Leading Economic Index had just broken upward to a new all-time high. 

3) Third, the selling has been extraordinarily intense and indiscriminate.  In some aspects, this reflects the type of selling panic normally seen near the END of a bear market instead of at the beginning.

The bad news is that we do not have many — or any — historical precedents upon which to rely with respect to the coronavirus pandemic.  The good news is that our Model Portfolio was defensively positioned with a high cash reserve prior to this panic selling.

And with our more conservative sector weighting, it would have been more resilient if not for the universal selling. Also, it’s important to keep in mind that while the S&P 500 Index has fallen all the way back to mid-2017 levels, our Model Portfolio finished today higher than where it started last year.

The volatility is clearly not over. We have seen an escalation of coronavirus impact and particularly fear — with travel restrictions and business closures. Although this effect could still be transitory, the unwinding of the Fed’s moral hazard (false investor confidence) on Wall Street could have a more lasting impact on the economic and stock market outlook.

While we were preemptively defensive and want to stay objective, we must also be disciplined. And based on the sudden increased possibility of recession, our comfort level has shifted to a lower level of allocation with a higher margin of safety. Our overall invested allocation of the portfolio from 65% to 58% and continues to shift the weighting toward more defensive sectors.

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