Markets Fall and Recover in the First Quarter

Markets Fall and Recover in the First Quarter
April 8, 2016 phillip_toews_1p9l0e9h

Stock downturns are common. Every decade over the past 100 years has produced at least one loss of nearly 20% or greater and most decades have produced multiple bear markets(1). The current decade, however, is a notable exception because we have not seen such a significant loss. And until the downturn this quarter, markets have produced few meaningful moves lower.

In the last part of 2015, markets were already weak and descended quickly in the first days of the new year(2). Between November 3, 2015 and February 11 2016, the S&P 500 Index had lost nearly 13%, and appeared to be headed even lower. Many new investors are allocated into Toews products each year, yet very few of our new investors have experienced Toews risk management results during a significant pull back. The recent decline provides an example of how Toews systems react during downturns that may be worth illustrating.

HYG performance is demonstrated by the HY Bond graph, EFA performance is on the International Stock graph, and S&P 500 Index performance is shown on the US Stocks graph.
The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Investors cannot invest directly in an index. All amounts shown in dollars. Source Bloomberg.

Before the year began, our algorithms reacted to a downturn in International Stocks and High Yield Bonds and exited to Money Market or defensive positions in mid to late November (see graphs above). Several days into the new year, our US Stock signal generated a move to a defensive position. For the remaining part of January and into the bottom in February, Toews was fully defensive across its platform.

When fully defensive, our investors are immune to further losses(4). And that’s the point. Our portfolios are designed to bolster performance when markets leave the rails. As we’ve seen over the past 20 years, stocks can move lower by as much as 50%(5). Most of our investors are unable or unwilling to sustain that level of decline. As losses play out, no one knows if markets will rebound or continue into oblivion.

From November 3, 2015 to February 11, 2016, the S&P 500 Index lost only 13% before rebounding. As a result of the rebound, our system triggered buys back into the markets and finished the quarter fully invested across all asset classes(5).

Risks and the Current Market Environment

Although markets have avoided a bear market over the past 7 years, we believe that the probability that markets will experience a significant decline are high, and increasing. We look to several factors in our assessment:

Company earnings continue to decline. For 1Q 2016, S&P 500 Index earnings are estimated to have declined by 8.5%. That makes this the fourth consecutive quarter of declines. We haven’t had 4 consecutive quarters of declines since Q4 2008 through Q3 2009. Furthermore, earnings are expected to continue to decline in the second quarter of this year(6). That is occurring at a time when stock prices are already high. Currently we’re pricing stocks at 22.6 times their 12 month trailing earnings, versus an average P/E of 15.9(7), putting us 30% above the average level.

Global debt continues to increase, creating a mounting challenge to growth. This unprecedented, decades long experiment with increasing global debt remains our chief concern for the global economy and financial asset prices. Last year global debt exceeded 200 trillion dollars(8), reaching new highs as a percent of economic output. Increasing debts and low interest rates tend to boost economic growth and financial asset prices. But reducing debt has the opposite effect. The question is how high can debts go and, if they exceed sustainable levels or if central banks are ultimately forced to increase rates, how severe are the consequences?

Debt levels can appear untethered to financial asset prices. But consider the housing debt bubble that preceded the financial crisis a key reference point. For years, housing prices and the unsustainable debt that fueled their rise was a boon to the economy. Ultimately, however, declining house prices and debt cratered the global economy.

The size and potential impact of the global debt bubble dwarfs what we saw during the housing bubble. It’s difficult to know what the consequences of the global debt bubble will be. It is clear, though, that high debt increases the fragility of the global economy and would likely increase the severity of potential recessions or asset price deflation.

So everything will be fine until it’s not. And then, it really won’t be fine at all. That sums up our perspective both about market risk and our current investment allocations. We’re now fully invested, and we know from experience and market history that bull markets can run a very long time, well beyond reasonable valuations. If the markets provide returns to our investors, we’ll take them. But our exit levels remain close. Like this past quarter, if they turn lower, we’ll become defensive until opportunities improve.

How Action Bias Influences our Decision Making

Investing isn’t easy. It is complicated by the fact that our intuition and other natural decision making abilities often work against us as investors. Among these tendencies is something referred to as “action bias.” Action bias is the desire to change something to get a different outcome regardless of whether the data and facts provide evidence that the change will result in the desired outcome. Action bias arises when people think they have a good idea of how to improve something or feel threatened that they do not understand a situation and want to try to fix what may not even be a problem in the first place.

This tendency to formulate a solution and take action makes us feel like we are getting something done even if that action may be counterproductive.

Highly successful people usually have a strong action bias. They have an idea and they take action until the series of actions they have taken lead to the desired result. However, highly successful people also know when to take action and when to be patient.

Advisors that work with Toews investors have typically designed portfolios to attempt to capture market gains. But they also have built in mechanisms to address market losses. In other words, actions that need to be executed are built-in to the overall portfolio design, preventing investors from needing to act. In most cases, the action needed by investors is to disengage from news about market gyrations and let the portfolio work over full market cycles. If you’re questioning your portfolios, contact your advisor to renew your piece of mind before the need to take action overwhelms you.


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.

Toews Corporation (TC) is an SEC registered investment advisory firm under the Investment Advisors Act of 1940.

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.

Any information provided by Toews regarding historical market performance is for illustrative and educational purposes only. Clients or prospective clients should not assume that their performance will equal or exceed historical market results and/or averages.

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.

An investment in Money Market securities are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although those investments seek to preserve the value of the investment at $1.00 per share, it is possible to lose money by the investment in those instruments.

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 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.

(1) Source: Global Financial Data
(2) Source: Bloomberg
(3) This refers to Toews traditional models when they exit to money market funds. Toews also manages defensive alpha portfolios, which become defensive but can experience losses are markets decline.
(4) Source: Bloomberg
(5) Based on losses of the S&P 500 Index, Source: Bloomberg
(6) Source:
(7) Source:
(8) Mckinsey Institute