Ron Rough, Chief Investment Officer, discusses how COVID-19 has affected the stock market in the first quarter and how FSA is managing this.
April Stock Market Update Transcript
Hello. This is Ron Rough with a market update video for April. First of all, from all of us at FSA, to all of our clients, friends, and families, our thoughts and prayers go out to you, anyone who is struggling through these extraordinary times. I’m sure everyone knows someone who either is struggling with the virus or has people they know that lost jobs. It’s truly an incredible time. We at FSA are trying to do our part. I’m in the office today. We got my cameraman Mike here with me, and we’re the only two people in the office, and on any given day, there’s only two or three of us in the office. All the other times we work from home. We are fully operational on a remote basis. All the trading can get done; advisers can answer your questions. So, we’re fully able to carry on remotely, and hopefully, it won’t be too long. If we’re following the social distancing and following the rules of the lockdown, we can flatten the curve and hopefully get the economy back working again.
Well, what about the quarter? Obviously, it was a pretty historical quarter, the worst quarter for stocks since 2008. As you can see from the chart here, stocks were down 20 to 30 percent on average. There was no place to hide except gold and Treasury bonds, so it was definitely a very difficult quarter. In terms of the FSA accounts, obviously we have, our safety nets have been hit across the board and we’ve gone to cash, had been there for several weeks now as we’ve mentioned in some of the other interim updates. Income, Income and Growth, Conservative Growth are 100 percent in money market at this point. Core Equity and Tactical have some modest equity allocations in the 20 to 30 percent range, but those positions are offset by an inverse fund which moves in the opposite direction of the stock market.
So you might ask, “Why do you have those funds? Why not just sell them?” Well, there’s a couple of reasons why we would keep funds and use inverse funds to offset their movements in a down market. Number one, if the funds are just doing relatively well, why would we want to sell a good manager that’s delivering alpha just because the market is selling off? Number two, and this is the case with one of our positions, the fund is closed to new investors so if we sell completely out of the fund, we may not be able to get back in to it. And then thirdly, for taxable accounts, there might be a tax reason why we might want to hold it.
Where to from here? What’s the path forward now for the markets? Well, you can see from this chart here we’ve had a sharp drop in the market. Now we had this bounce, so from here we see three scenarios that can unfold. Number one, stocks continue to bounce from here. We don’t think that’s a very high likelihood, but that’s what happened after the decline in December of 2018. The more likely scenario, as we see it, is that in the days and weeks ahead stocks roll back over and go back to the lows that we saw in late March, and from those levels, one of two things could happen. Number one, stocks could bounce from there. That’s the more likely scenario. That’s typically what we see in these types of sell offs. However, the other scenario is stocks actually break lower from here and we have another leg down. That’s what we’ve seen in more serious bear markets such as 2008, 2001 and 2.
Do we have a house opinion about which scenario? We don’t. We’re not in any hurry to get reinvested, but we do have a plan in place regardless of the path that the market takes forward. So rest assured that we’re following these developments and really the, this market will get back on its feet once we’ve been able to see the market has been able to see progress on the, on the pandemic, when the curve starts to flatten, people start getting back to work, the economy starts back humming again, the market will start to react to that, and we will too.
Well, that’s all for now, so thank you for watching, and stay safe and stay healthy.