Driving Whilst Looking Backwards

Driving Whilst Looking Backwards
January 13, 2015 phillip_toews_1p9l0e9h

Want to grasp the counter-intuitive nature of investing? Try driving whilst looking to the rear (see lengthy liability disclosure below). Or, if that seems like a bad idea, carefully consider these probable outcomes:

The counter-intuitive nature of investing is both perilous and unrelenting. After markets rise, we “feel” like there are more gains ahead. If gains continue, optimism increases. If gains are persistent, enduring, and stratospheric, investors pile in like crazy and… crash! And it’s all from investing while looking backwards.

While we can’t see what’s ahead for the stock market, we do have clues from looking back, and we can get some hints from looking out the side windows at the terrain.

Behind us we see only gains now for over 6 years. At Toews, that alone is cause for concern. How does the terrain look? Among the myriad of ways to assess the stock market, we favor one of Warren Buffet’s indicators that compares the total value of outstanding U.S Stocks to U.S. Gross Domestic Product (see chart below).

In looking at the chart we see a number of extreme highs and lows since 1950. In 1968 U.S Stocks peaked at 86% of GDP. In 1999, stocks reached a phenomenal 153% of GDP. And in 2007 we reached 112% of GDP. Where are we now? Unfortunately we’re at 123% of GDP, higher than at any point over the past 65 years except the 1999 peak.

The Buffet Indicator: Corporate Equities to GDP

Each of the prior peaks shared two common characteristics. First, they occurred after prolonged stock market rallies (gains in the rear view mirror). Second, each was followed by significant bear markets to the tune of 50% stock declines.

Who knows how high stocks will go? However, it’s likely not time to step on the gas.

Toews Remains Partially Defensive Entering the New Year

Commensurate with our discussion on risk above, the markets experienced increased volatility during the fourth quarter. In October, markets fell broadly prompting Toews to fully exit stocks. A recovery in the second half of October prompted a re-entry into most asset classes. However, further erosion in developed international and emerging markets stocks caused both of those asset classes to again move to cash. Toews began the quarter fully invested in U.S. Stocks with all foreign stocks fully defensive in cash positions.

Our Dynamic Fixed Income models that invest in High Yield and Aggregate Bonds also moved to a protective stance during the quarter. The decline in High Yield bonds picked up steam during the fourth quarter, a move that Toews largely avoided. We start the year fully defensive in our High Yield Portfolios, holding only an Aggregate Bond position.

Toews Set to Continue Exiting Assets if Decline Intensifies

Markets began the New Year with declines. If they continue lower we are in a position to exit US Stocks and be fully defensive across our platform.
The path to navigate these markets and address possible significant declines is straightforward but requires constant vigilance: 1) stay committed to equity markets, historically the best performing asset class to help protect against inflation and 2) hedge your 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. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to www.toewscorp.com. Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index.