Current Positions:
High Conviction Tactical Models*1:
Developed International Stocks: 100% Cash Instruments
High Yield Bonds: 100% Cash Instruments
US Stocks: 100% Invested
Investment Grade Bonds: 25% TIPS, 75% Cash Equivalents
Equity Portion of Defensive Alpha Models*:
70% Invested Posture†
Recent Trades
In early to mid-January we exited US Stocks and High Yield Bonds, and later sold our International stock exposure. Those trades occurred during the early part of a downturn that saw the S&P move into correction territory, while the NASDAQ Composite index briefly moved into a bear market.
The invasion of Ukraine exacerbated losses as Oil surged over 30% and commodities prices spike higher.
Over the past few weeks, as oil prices have moderated, stocks have rallied off of their lows.
That rally pushed stocks into a buy range and on Thursday the 26th, we began taking on US stock exposure. Today we completed that buy and are currently once again fully invested in US Stocks. Our Developed International Stock exposure remains on the sidelines.
While stocks have rebounded, High Yield Bonds largely have continued to decline due primarily to pressures from rising interest rates. High Yield bonds remain in cash equivalents, the best place to be in the fixed income space in our opinion.
Market Environment
Our base case, even before the invasion of Ukraine, was that the markets were headed for a bear within 12 to 18 months. That case becomes even stronger after the invasion of Ukraine. However, several things could lead to a market rally over the short term.
Earlier this month I drew analogies between the invasion of Ukraine and the 1990 invasion of Kuwait. In 1990, oil prices nearly doubled over 70 days, creating downward pressure on stocks. Similarly, oil surged above 130 in the weeks following the Kuwait invasion. However, prices have since moderated, helping to lead to a broader stock market recovery.
Further gains may hinge on the outcome of the war in Ukraine and commensurate pressures on commodities and energy prices.
A bullish case could be realized if Russia unexpectantly reduces its ambitions to limited areas of Ukraine or engages Ukraine in meaningful negotiations to end the war. Bullish jubilation from keeping Putin in check could be matched by short term market elation.
The Bearish case may play out if the war becomes protracted, and fears about continued pressure on oil and commodities prices is realized, adding to downward pressures on an already over-valued market. That, along with a fed that may be unable to turn dovish to address a falling market, may lead to a longer term bear.
Falling Bonds
For years we’ve talked about the possibility of a bear market in bonds. Yet, bonds remained resilient despite threats of rising rates. Finally, however, bonds are experiencing meaningful losses. Over the past 19 months aggregate bonds have lost 9% and long-term bonds are down more than 22%. Add inflation, and real losses are approaching 20% even in investment grade core bond holdings.
Advisors that hold conventional bond holdings should consider unconstrained strategies that attempt to address further threats from rising rates and inflation. Furthermore, balanced portfolios are vulnerable if both stocks and bonds fall together over the coming year.
We will 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