In our last commentary we discussed two divergent opinions on the economy. The optimistic view was represented in a recent WSJ poll, where the consensus of economists predicted slow but steady US GDP growth of 2.5% in 2012, with average monthly employment gains of 185,000. The opposing view, presented by the Economic Cycle Research Institute (ECRI), an astute and highly reliable forecasting firm, was that a recession for the US economy was imminent, likely beginning in May or June of this Year (watch a recent ECRI economic update video here). As we stated in our commentary “if the ECRI is correct, it would mean a recession that market participants haven’t anticipated. This outcome would likely produce a dramatic sell-off of stocks.”
Data over the past few months clearly favor the ECRI position. Even though employment growth is a lagging indicator, it is now clearly trending lower. GDP growth has slowed from 3% in the 4th quarter of 2011 to 1.9% in the 1st quarter of this year. This lagging data does not yet reflect the impact of a worsening situation in Europe and signs of a slowdown in China. Finally, stresses from sovereign EU debt have returned in full force. Rates on the Spanish 10 year are back near 2011 highs, while the Italian 10 year is again flirting with the 6% rate. These along with a confluence of deteriorating economic data suggest that a largely unanticipated economic slowdown is playing out and the risks of a more significant decline in risk assets are high.
While data could improve over coming months and turn stocks higher, we feel strongly that adding risk management strategies to portfolios in this environment is prudent and desirable.
Current Toews Positions:
US Stocks: 100% cash
HY Bonds: 100% cash
International Developed Stocks: 100% cash
Emerging Markets’ Stocks: 100% cash
For advisors who wish to add risk management strategies to portfolios, we recommend quick implementation.
The key to successful hedging is to exit assets in the early stages of a decline, before realizing substantial losses. This is one of the most important characteristics of our tactical model. Once substantial losses are realized and clients are emotionally motivated to exit stocks, implementing tactical strategies creates a dilemma: exit markets and realize losses, protecting against more declines but increasing the risk of selling near a bottom, or continue to hold long positions betting that markets will rebound while risking additional losses and increased client frustration. The longer one waits to implement the hedging strategy, the more pronounced the two sides of this dilemma become. We believe that we are in the early stage of this decline and investors who implement hedging strategies now may still avoid the worst of a decline should markets deteriorate from here.
Phillip R. Toews, President/CEO
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.