Current Positions:
High Conviction Tactical Models*1:
Developed International Stocks: 100% Invested
High Yield Bonds: 100% Invested
US Stocks: 100% Invested
Investment Grade Bonds: 100% Invested
Managed Risk: Approximately 3.8% out of money from its LEAP Put strike price
Equity Portion of Defensive Alpha Models*:
100% Bullish Posture†
Recent Trades
We began moving into International Stock Positions on Tuesday and US Stocks Positions on Wednesday this week and completed our moves at the Friday close. On Monday, we’ll be fully invested for all equity asset classes!
This follows bullish tactical moves for our High Yield Bond positions several weeks ago, pushing us to a fully bullish posture across our platform for now.
Market Environment
Are we persuaded that the bear market is over? Not even close! However, we also don’t pretend to be able to guess short term market direction. Recall that in April of 2020, as the world was bleaching their groceries before bringing them into their houses and the world was shut down due to COVID, markets entered a fierce and durable rally, all pre-vaccine.
Two things to think about are that 1) as mentioned above, markets can move in the opposite direction of the economy and, 2) markets tend to advance well before economic contraction abates. In other words, anything is possible, including a potential rebound during the fourth quarter.
However, if the market bottoms out here, it will be an uncommon event based on equity valuations. Since 1990, the S&P 500 has found its low in a range of 13 to 14 times forward earnings[i]. At a current level of 17.7 times forward earnings[1], that would project a market trough 26% lower than current prices, at an S&P level 2,913. That forward earnings number, however, assumes that earnings will grow by 5.7% in 2023[ii]. Further downward earnings projections, expected by a number of market strategists, could potentially move us lower.
In our view, the primary flawed assumption being made by advisors is that this bear markets by will be of limited duration of roughly 12 to 16 months, after which all will be well again. We hope that’s true. However, two parameters work against investors during declines, the percent decline, and its duration. When declines expand to durations more than two years, the potential impact on investors, especially those taking distributions, is greater.
Just as COVID has come and gone in waves, it’s possible that even a rally this quarter could lead to additional losses, and new lows, over the coming year(s). That makes the question more complicated than just “am I invested or defensive.” Instead, it becomes a question of how to navigate a shifting market. Advisors interested in contingency planning, for both the rosy and the pessimistic scenario, should position portfolio in for either outcome. Our specific advice to accomplish this is to:
- Move at least half of stock portfolios to hedged equity strategies that attempts to uncorrelate from market falls but have the ability to attempt to capture the rebound once the market bottoms.
- Leave conventional bonds in favor of unconstrained bond strategies that can move to ultra short duration bond positions, TIPS, or High Yield Bonds to attempt to minimize principal losses.
We’ll keep you updated as our models react to market moves.
Toews Management Team
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, and no representation is being made as to whether the information provided herein would be beneficial for any or for a specific Employer Benefit Plan or investor.
For additional information about Toews, including fees and services, send for our disclosure statement as set forth on Form ADV by contacting Toews at Toews Corporation, 1750 Zion Road, Suite 201, Northfield, NJ 08225-1844 or (877) 863-9726.
(1)These include the Toews Capital Preservation, Balanced, Balanced Income, Balanced Growth, Growth, and All Equity, High Income, Balanced Income, and Conservative Income portfolios. They do not reflect the allocations of these strategies that are not allocated to Toews Funds.
(*)Exposure to vehicles invested in the listed asset classes
(†)Approximate Defensive Allocation