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View From the Top

By:

CFP: CEO & Chief Investment Officer

The past month has been one of the most interesting in a very long time. The markets have oscillated from bullish to bearish almost overnight and back again at a pace that has rarely been seen. The prevailing narrative controlling the market direction appears to change more often than a teenager changes his … you get the idea.

As a portfolio manager, the hardest question to answer right now is, “Do I even know the risks we are facing?” Risks can  be factored into equity prices in a relatively efficient  manner;  it is the unknown risks that become very hard to determine if they are being priced in correctly. Looking at the landscape today I see a bevy of potential Black Swans that could derail investors (yes, a group of swans is called a bevy). What if the election results in a 269-269 division of electoral college votes? What if some states decide to allow votes for a week after the November 2nd and the winner changes daily as mailed in votes are counted? The potential for a legally contested election result lasting months and going to a Supreme Court with currently only 8 justices is a possibility that cannot be ignored.

Given the risks, the prudent course of action for many investors is to sit on the sidelines and wait for more clarity. Sadly, unless investors are willing to earn 0% on their portfolio, risks remain. In typical equity bear markets U.S. Treasuries are a great hiding place, but will that be the case when the 10-year Treasury bond is yielding 0.65%? There are  also tax consequences that must be factored considering the recent gains in stocks over the last couple of years. Often selling means paying around one-third of your gains in taxes to go to cash and make nothing. In essence, there are no “Easy” buttons for investors today.

Many analysts are highlighting the upside potential of the markets long-term, but at what potential cost in the short- term? Making decisions even more difficult is uncertainty surrounding COVID-19 and the potential of a second wave of the virus. We are just beginning to understand the permanent impact  of  the  forced  lockdown  of  the  economy  across the U.S. A recent Harvard University study indicated that 100,000 small businesses have permanently closed but that is the tip  of the iceberg. A total of 4.2 million small businesses have received assistance from the CARES Act  and  chief economist  Mark  Zander  of  Moody’s  Analytics  believes that more than 1,000,000 of those businesses will close and all  the associated jobs will be lost.

Right or wrong, many investors are undeterred by the challenging times we are in on the assumption that the Fed will be able to offset the economic impact of  the  lockdown and election results. That might ultimately be the right call but the risk of being on the wrong side of that trade could be disastrous given the current valuations in the markets. If the bevy of black swans dissipate and no scenario plays out that results in market panic, there may be 5-10% of upside potential over the next 6-12 months. If any of the alternative scenarios  occur, it is entirely  possible to see a correction along the lines of 2008/2009 where the S&P 500 fell more than 40% before bottoming out in March 2009.

Most concerning for me long term is how divided the country has become politically and the potential for that to spill over economically. The inability to pass a stimulus bill that both sides appear to agree is needed is a symptom of the larger problem. As the chart suggests, two people can look at the same circumstances and come to literally opposite conclusions. Will widespread mail-in voting/ballot harvesting result in election fraud? It might, depend on who you are asking that question. Given the “suspicion” on both sides of the political spectrum, if I could go “long” attorneys  that  seems to be the surest bet right now.

Whenever you determine that downside potential is roughly  4X upside potential, it is reasonable to make sure you have sufficient hedging in place. We are closely watching the correlation between equities and Treasuries, and if the relationship becomes positively correlated it will be necessary to have alternative hedges at the ready. The only certainty seems to be that volatility will remain elevated and the need  to remain tactical to respond to the changing environment is as important as ever.

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Originally Posted in October 2020 – View From the Top

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Peak Capital Management, LLC, is a fee-based SEC Registered Investment Advisory firm with its principal place of business in Colorado providing investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. Advisory services are only offered to clients or prospective clients where our firm and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Peak Capital Management, LLC unless a client service agreement is in place. Nothing herein should be construed as a solicitation to purchase or sell securities or an attempt to render personalized investment advice. To receive a GIPS compliance presentation and/or our firm’s list of composite descriptions, please email your request to info@pcmstrategies.com. Peak Capital Management claims compliance with the Global Investment Standards (GIPS). GIPS is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.  DRH Global Growth Composite Description: The composite represents an investment designed for long-term capital appreciation. The strategy allocates risk primarily across five U.S. equity factors and developed and emerging markets, and U.S. Treasuries. The strategy also has the ability to take inverse positions and use cash to manage overall risk. The strategy is implemented primarily using exchange traded funds (ETFs) domiciled in the U.S. DRH U.S. Growth Composite Description: The composite represents an investment designed for long-term capital appreciation. The strategy allocates risk primarily across five U.S. equity factors, and U.S. Treasuries. The strategy also has the ability to take inverse positions and use cash to manage overall risk. The strategy is implemented primarily using exchange traded funds (ETFs) domiciled in the U.S. DRH Balanced Income Composite Description: The composite represents an investment designed for long-term capital appreciation. The strategy allocates risk primarily across five U.S. equity factors, and U.S. Treasuries. The strategy also has the ability to take inverse positions and use cash to manage overall risk. The strategy is implemented primarily using exchange traded funds (ETFs) domiciled in the U.S. DRH Income Composite Description: The composite represents an investment designed for current income. The strategy allocates risk primarily across fixed income and dividend paying equities. The strategy also has the ability to take inverse positions and use cash to manage overall risk. The strategy is implemented primarily using exchange traded funds (ETFs) domiciled in the U.S. Composite total returns are provided period to date since composite inception. Composite returns are presented net of fees. Benchmark total returns are presented according to composite inception date. The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with the indexed assets comprising approximately USD 3.4 trillion of this total.  The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.  The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). The U.S. Dollar is the currency used to express performance.

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