Market Update and Model Portfolio Reviews 5/31/2020

For the month of May, domestic large cap equities finished up 4.76% and down -4.97% year to date.  Investment Grade Bonds* finished the month up 0.47% and up 5.47% year to date.  The unemployment rate increased to 14.7% in April, the highest level on with record of the data series provided by the U.S. Bureau of Labor Statistics.  May unemployment data will be released on June 5th.  A few leading indicators of the May unemployment data are initial weekly unemployment claims and continuing U.S. jobless claims.  So, why is there such a disconnect between the underlying economy and the stock market domestically?  The New York Times illustrates this very well, when we consider the additional federal unemployment payments included from the CARES act.  For lower paying jobs that have been lost due to the pandemic, income replacement has been near to previous wages, and in many states, higher than one's previous wages.   It is estimated that these additional stimulus payments ($600/weekly benefit) will end in July without further coordinated Congressional support.  This shows that even with current record unemployment rates, the market has been able to shrug off a lot of the pandemic concerns as incomes have largely been replenished with state and federal aid.  Essentially, the Federal aid aimed to encourage job seekers to stay at home to help reduce the spread (stay at home pay) as well as provide additional support to those who have lost their jobs through no fault of their own.  When you look at reasons for unemployment, you find that nearly four out of five unemployed persons are on temporary layoff (in other words, the proportion of survey respondents that believe they will return to work). This is encouraging on the surface, but concerning if a large portion do not have the ability to return to work in the future.  Looking at the same data tables from 2009 and 2010, the figure is almost the opposite (when ignoring job leavers, new entrants, and reentrants).  That is a good thing, right?  Maybe… The University of Chicago’s Becker Friedman Institute lays out a framework and a summary:
Drawing on our survey evidence and historical evidence of how layoffs relate to recalls, we estimate that 42 percent of recent pandemic-induced layoffs will result in permanent job loss. If the pandemic and partial economic shutdown linger for many months, or if pandemics with serious health consequences and high mortality rates become a recurring phenomenon, there will be profound, long-term consequences for the reallocation of jobs, workers and capital across firms and locations.

They present their findings and conclusions as a reallocation shock, as temporary behavior shifts to more permanent behavioral shifts.

NYTimes Unemployment Ben w Fed Stim 2020

Reopening Framework – Investment Framework

Let’s take a step back and ask:  “just how many people can this virus infect?”  The one theory that we can articulate confidently is that the upper limit of those that can get COVID-19 is, plain and simple, the entire population (that is not our base case).  One objective and insensitive take is that the economic damage done has been driven more by fear of the virus than by the virus itself.  Over 20 million Americans are unemployed, but so far there are less than 2 million confirmed cases in the U.S.  (Both of these numbers, in our view, will continue to grow in the coming weeks/months.)  About a quarter of the labor force has the ability to work from home, according to a Bureau of Labor Statistics study covering 2017-2018.  This number seems much higher during the pandemic. 

What can we draw from other countries and states that have gone through the reopening process?  Domestically, several states come to mind, with one in particular raising concern.  California makes up the largest proportion than any other state of our domestic economy when measured by gross domestic product.  On May 8th, the State of California entered into the second stage of their reopening process, which included retail, manufacturing, offices, and more public spaces.  There has been a noticeable daily increasing trend in case counts, but hospitalizations have been trending lower or staying flat.  We see similar trends in other states, such as Alabama, Arizona, Mississippi, North Carolina, Texas, Virginia, and Wisconsin (as of May 30th).   There is a tremendous amount of research and information available on the virus, its causes, its symptoms (and non symptoms), and rates of transmissions when accounting for seasonality (warmer weather).  Are we any better prepared for a new wave of virus spread?  How do we tie these concerns into our investment process

It appears that we are better prepared for a second wave of the virus—and that second waive, in our view, is inevitable.  States have their own evolving policy measures in place, and as we have seen across states, these measures will be different state by state.  How willing and able are states to walk back their reopening plans and how obedient will residents be to policies and guidelines?  We believe that a new waive will come earlier than the fall.  Individual behaviors have changed for many over the course of this pandemic, but how much of that change in behavior is permanent or at least partially changed? 

Our stay at home theme from our March changes have rewarded the model strategies through the end of May.  What we will call a “value trap” in our energy exposure (similar to catching a falling knife), has led the way since our March 23 rebalance, followed by Consumer Discretionary and Technology.  Everything but our long duration allocation provided a positive lift, since that rebalance through end of May.  For the month of May, we had two rebalances surrounding Memorial Day weekend.  On Friday, May 22, we rebalanced models to their March 23 strategic weightings, but also exited our Hong Kong exposure, leaving that weighting in cash.  On Tuesday, May 26 we linearly raised cash by 10% across all portfolios by trimming all holdings (except cash) by 10%. 

Three core risks remain as we head into the second half of the year. 
 

1) Does anyone remember that it is still an election year?  What does a change in tax policy under a new president look like?  The headline is an increased tax on corporations from 21% to 28%, which would reduce some of the windfall from the 2017 tax changes.  Revenues and then earnings drive asset valuations, higher taxes, lower earnings, and bring down asset prices.  That said, successful corporations will continue to find ways to embrace tax avoidance, but broadly this should be a concern for asset prices under a new administration.
2) U.S. – China tension reescalate, as China imposes national security laws on Hong Kong.   Does phase 1 of the trade deal get walked back? 
3) The second wave of the coronavirus comes back before the fall, stronger than the first wave, vaccine candidates lose momentum, walk back of the reopening process across states with renewed stay at home guidelines.  There has been an overwhelming harmony between our Central Bank (Federal Reserve) and Government stimulus.  The U.S. Central Bank is seemingly committed to a whatever-it-takes approach while, there is risk that fiscal stimulus does not get coordinated congressional support.  

High Cash Levels = Contrarian Buy Call?

Institutional MMKT Balances 2020-05-31.p

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. *Trailing returns as of 5/29/2020 and are annualized returns if over 1-Year.  See “Model Disclosure” page for important disclosures and information – Total Period Measured 12/31/2016 – 5/29/2019.  “Inception” refers to Inception to Date. Inception calculation assumes end of day market prices on 12/30/2016 for starting period values to calculate Inception to Date figures.  Performance presented net of highest advisory fee. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Disclosure WARRANTIES & DISCLAIMERS

There are no warranties implied. Alternative Capitalis, LLC (“RIA Firm”) is a registered investment adviser located in Massachusetts. Alternative Capitalis, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Alternative Capitalis, LLC’s presentation is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Alternative Capitalis, LLC’s presentation should not be construed by any consumer and/or prospective client as Alternative Capitalis, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the presentation. Any subsequent, direct communication by Alternative Capitalis, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Alternative Capitalis, LLC, please contact the state securities regulators for those states in which Alternative Capitalis, LLC maintains a registration filing. A copy of Alternative Capitalis, LLC’s current written disclosure statement discussing Alternative Capitalis, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Alternative Capitalis, LLC upon written request. Alternative Capitalis, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Alternative Capitalis, LLC’s presentation or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This presentation and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This presentation and information are not intended to provide investment, tax, or legal advice.

Model Disclosure

Alternative Capitalis, LLC is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Model Performance Disclosure: The performance shown represents only the results of Alternative Capitalis, LLC’s model portfolios for the relevant time period and do not represent the results of actual trading of investor assets.  Model portfolio performance is the result of the application of the Alternative Capitalis, LLC’s proprietary investment process.  Model performance has inherent limitations. The results are theoretical and do not reflect any investor’s actual experience with owning, trading or managing an actual investment account. Thus, the performance shown does not reflect the impact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Model portfolio performance is shown net of the model advisory fee of 1.25%, the highest fee charged by Alternative Capitalis, LLC.  This reflects a change from Alternative Capitalis, LLC highest fee charged to a client(s) account from 1% to 1.25% annually.  April 1, 2018 model performance to most recent date presented adjusts for the higher 1.25% annual fee. Model portfolio performance is shown net of the sample trading costs based on our Custodian’s, TD Ameritrade Institutional, trading costs. Performance does not reflect the deduction of other fees or expenses, including but not limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the model performance was obtained from sources deemed reliable and then organized and presented by Alternative Capitalis, LLC.   The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio. The performance calculations are based on a hypothetical investment of $100,000 for both the model and benchmarks presented. On July 23, 2018, we corrected previously reported month end performance reports to account for transactions costs (trading fees) related to rebalancing model portfolios.  The month end reports effected ranged from 2-28-2018 to 5-31-2018.  Prior reports accounted for transaction costs related to trading fees.  The four reports have been corrected and updated on Alternative Capitalis, LLC website (www.altcapitalis.com).  2-28-2018 had the largest variance in incorrect performance reported with an average of 9 BPs (“basis points”) (0.09% or 9/100 of 1.00%) of overstated positive performance in the models and ranged as high as 15 BPs to as low as 2 BPs.  A comparison chart of the variances in reported performance can be provided upon request.   Benchmarks: The performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following two ETF’s symbols, SPY & AGG, are described below.  The benchmarks used are investable ETFs and their performance calculation is inclusive of the highest fee charged to a client(s) account, 1.25% annually.  This will reduce the total return of the investable benchmark by the annualized rate of 1.25%.  The ETF symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index").  Visit https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY for more information about the ETF. The S&P 500® Index results do not reflect fees and expenses and you typically cannot invest in an index.  The ETF symbol AGG (iShares Core U.S. Aggregate Bond ETF). The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. (the "Index"). Visit https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf for more information about the ETF. The index composed of the total U.S. investment-grade bond market results do not reflect fees and expenses and you typically cannot invest in an index.  The benchmark is blended representing a weighting of a percentage (%) to SPY and percentage (%) to AGG based on the respective model weights below.  Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured.  Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured.  Return Comparison: To benchmark the results, the ETF (exchange-traded-fund) symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index").  The S&P 500 was chosen as it is generally well recognized as an indicator or representation of the stock market in general and includes a cross section of equity holdings. In addition, the ETF symbol AGG was chosen as a benchmark. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.  The total U.S. investment-grade bond market was chosen as it is generally well recognized as an indicator or representation of the bond market in general and includes a cross section of debt holdings. For each respective model benchmark the performance measurement weightings are as follows to SPY / AGG %: 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10 % respectively for Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive, Ultra Aggressive. OPTIONS TRADING RISK DISCLOSURE: Options Trading – Both the purchase and writing (selling) of options contracts –involves a significant degree of risk not suitable for all investors.  Investors should carefully consider the inherent risks and financial obligations associated with options trading as further detailed in the Options Clearing Corporate booklet “Characteristics and Risks of Standardized Options.” 233 Harvard St, #307, Brookline, MA 02446 is Alternative Capitalis, LLC’s client facing address. All books, records, receipts, correspondence (mailing address) and day to day operations are located at 1565 West St, Wrentham, MA 02093.

Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. The results presented before 12/31/2016 for model performance assume that the weights initially held on that date were held at the unset of any performance presented before 12/31/2016.  This assumes results based on discretionary models that are not purely quantitative or rules based. Global Benchmarks: The performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following three ETF’s symbols, VT, BNDX & BND, are described below.  The benchmarks used are investable ETFs and their performance calculation is inclusive of the highest fee charged to a client(s) account, 1.25% annually.  This will reduce the total return of the investable benchmark by the annualized rate of 1.25%.  Additionally, the ETF’s that lack the track record to cover the entirety of the period presented have been backfilled with index data that Alternative Capitalis, LLC deems appropriate as a proxy of the chosen ETF’s hypothetical track record.  Below is the summary of backfilled data and time period:

 

 

 

 

 

 

 

The ETF symbol BNDX (Vanguard Total International Bond ETF). The Vanguard Total International Bond ETF attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Visit https://investor.vanguard.com/etf/profile/BNDX for more information about the ETF. The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.  Visit https://investor.vanguard.com/etf/profile/VT for more information about the ETF. The ETF symbol BND (Vanguard Total Bond Market ETF). The Vanguard Total Bond Market ETF attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. Visit https://investor.vanguard.com/etf/profile/BND for more information about the ETF.  The benchmark is blended representing a weighting of a percentage (%) to BND, percentage (%) to VT and percentage (%) to BNDX based on the respective model weights below.  Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured.  Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured.  Return Comparison: To benchmark the results, the ETF symbol BNDX (Vanguard Total International Bond ETF) attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The Vanguard Total International Bond ETF was chosen as it is generally well recognized as an indicator or representation of the global bond market, ex-U.S. bonds, and tracks an investment-grade, non-USD denominated bond index, hedged against currency fluctuations for U.S. investors.  The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. The Vanguard Total World Stock ETF was chosen as it is generally well recognized as an indicator or representation of the global stock market and tracks a market-cap-weighted index of global stocks covering approximately 98% of the domestic and emerging market capitalization. The ETF symbol BND (Vanguard Total Bond Market ETF) attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. The Vanguard Total Bond Market ETF was chosen as it is generally well recognized as an indicator or representation of the U.S. Domestic bond market, and tracks a broad, market-value-weighted index of U.S. dollar-denominated, investment-grade, taxable, fixed-income securities with maturities of at least one year. For each respective model benchmark the performance measurement weightings are as follows to BND/VT/BNDX %: 66/20/14, 57.8/30/12.3, 49.5/40/10.5, 41.2/50/8.8, 33/60/7, 24.7/70/5.3, 16.5/80/3.5 and 8.2/90/1.8 % respectively for the Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive and Ultra Aggressive Global Benchmarks. DRAWDOWN ASSUMPTIONS: Domestic Benchmark -36.90%, Global Benchmark -41.00%, and Growth & Income Model -18.00% (see “Third Party Disclosures” page).  Limitations of the assumptions include, but are not limited to, backfill index bias, time period bias and assume no changes to the model presented over the drawdown period.  An advisory fee of 1.25% is also included in the calculation for the model and benchmarks over the drawdown period.  Transaction fees for the model over the drawdown period are excluded as positions are assumed to be held constant.  The benchmark drawdowns use the as calculated drawdowns over the periods measured from 10/9/2007 to 3/9/2009 for the domestic benchmark and from 10/31/2007 to 3/9/2009 for the global benchmark.  The Growth & Income Model uses third party software to present a hypothetical drawdown in which calculations of the current holdings were not available during the drawdown period relative to the benchmark.  There is no guarantee as to the accuracy of the third party drawdown assumptions nor should one draw any conclusions as to the accuracy and likelihood of the data presented. The Growth & Income Model drawdown assumption is based on a third party report dated September 24, 2018 (This report is available upon request).

 
The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.