Toews portfolios began the quarter fully invested. Only a few days into the quarter, however, markets turned lower and continued in a negative trend through most of May and June. For the quarter, the S&P 500 lost 2.8%. International Developed Stocks (EAFE) lost 7.1%, while Emerging Markets Stocks (MSCI EM) fell 8.9%. Toews exited equities markets in May and finished the quarter with 100% of equity portfolios in cash. High Yield Bonds have largely eluded the declines experienced in equities. Toews High Yield and High Quality Bond positions were fully invested at the end of the quarter.
Global Economy Appears Poised for Downturn
Market headlines renewed their focus on sovereign debt issues over the past few months. Behind the scenes, however, China, India, Japan, the EU, and the US all saw their economic data deteriorate during the 2nd quarter. That represents 80% of the global economy now showing signs of slowing. The euro zone economies are headed into a recession in 2012 as a result of the rise in sovereign yields and the effects of bank deleveraging on the real economy. Growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand, according to the IMF. In the US, earnings outlooks have been pounded by global turmoil. For every company that raised its second-quarter profit outlook, 3.6 have lowered theirs, the worst ratio since the third quarter of 2001, according to Thomson Reuters.
While the stock market moved lower during the quarter, the magnitude of the drop doesn’t yet reflect the significance of the global economic decline underway. Positive developments from EU authorities regarding sovereign debt solutions are welcome news, but unless economies begin to show signs of improvement, stock market declines may intensify from here.
Toews Dynamic Hedging during Declining Markets
Although the outlook for the stock market is dire, we remain cautiously optimistic. The crucial advantage of our methodology is its ability to attempt to avoid the bulk of market declines. If this is achieved successfully, it creates an opportunity to buy near market lows and participate in rebounds. As a result, it may be possible to produce positive returns even when the market is losing money or moving sideways.
Secular bear markets include not just large drops, but sizable stock market rallies. During the Great Depression, the stock market was in various stages of decline from 1929 through 1942. Despite the decidedly negative bias of the market, the Dow Jones Industrial Average experienced 7 bull markets with returns producing average gains of 54%, lasting on average 7.5 months. Systems that successfully avoid big declines can provide decent returns for investors if they participate in even a portion of these robust market rallies.
The path to navigate these markets is straightforward but requires constant vigilance: 1) stay committed to equity markets, the best performing asset class that helps protect investors against inflation; and 2) hedge your equity portfolios against losses. Both are pillars on which the Toews system is built.
Prior performance is no guarantee of future results. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.
This commentary may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice. Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.
This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter.