Sovereign debt issues have taken center stage to press stock prices down with increased ferocity. The S&P 500 declined 14% for the quarter, while the MSCI EAFE index (Developed International Stocks) dropped 19%. Our system exited developed international stocks in mid-July. By late July/early August, our system had completed exiting US stocks and HY Bonds and was allocated to cash across all portfolios . Currently we are invested 100% in cash across all asset classes that are tactically managed with Toews methodology.
From its peak this year through September, the S&P 500 declined 17%. In the first days of October, the decline continued, pushing the S&P 500 briefly into bear market territory (defined as a decline of 20% or more). To put this into context, the advance off of the lows in 2009 brought the market 101.6% higher. The market would have to fall an additional 38% before we pierced the lows in 2009.
Investors scrambled to exit stock funds. In excess of $75 billion was withdrawn from stock funds during the past four months according to the Investment Company Institute. By comparison, following Lehman’s bankruptcy, outflows totaled $72.8 billion from October 2008 through February 2009. This could be taken as a contrary indicator, suggesting that we’re at the bottom. However, it may also be an indication of investors’ willingness to abandon stocks during market declines. If the market continues on a volatile path lower, we anticipate a possible “investor revolt” from investors who have grown weary of stock declines over the past 12 years.
What Lies Ahead
Early last week, the Economic Cycle Research Institute (ECRI) notified clients that the U.S. economy “is indeed tipping into a new recession–and there’s nothing that policy makers can do to head it off.” The ECRI has correctly predicted the last three recessions, without any false alarms in between. If, as it appears, we’re reliably headed back into recession, let’s take a look at the implications for the economy and for our investors’ portfolios.
We would point out that recessions are a natural part of economic cycles. Since the beginning of the Great Depression, the country has entered into a recession every 4 and 3/4 years . Assuming that we do enter into another recession, the effect on the economy will be determined by its duration and severity.
The circumstances surrounding the most recent recession stand out relative to other post-war recessions. The sustained increase in unemployment and decrease in housing prices during the past three years far exceeds those of all other post-war recessions. We also have the ominous and growing sovereign debt crisis in the US, Europe, and Japan. These additional factors increase the possibility of additional shocks to the system which could turn a mild recession into a full blown economic fracas. In our opinion, entering into recession increases the chances that stocks will continue to decline. A severe recession practically guarantees it.
The Toews Strategy during Periods of Crisis
Our purely reactive strategy attempts to exit markets during the beginning phase of a decline and thus avoid big drops. We typically don’t avoid all declines and often experience some losses as we exit during the “initial phase of losses” as we have this quarter.
However, when the market experiences big declines, it creates opportunities to buy near market lows and participate in rebounds. As a result, we are capable of producing positive returns even when the market is losing money or moving sideways.
The reason that we have been able to produce positive returns during the secular bear market that began in 2000 is that long-term declines often 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, there were 7 bull markets with returns producing average gains of 54%, lasting on average 7.5 months .
In summary, we view the risks ahead as an opportunity for profit.
Disclosure
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 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.
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. There is the potential for loss as well as profit when investing in this, or any, investment strategy. No part of this document should be considered unless accompanied by these disclosures.
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 and is an SEC registered investment advisory firm incorporated in 1994.