Commentary on our recent strategy changes

As you know, this past Monday, we executed our strategic decision to concentrate more of your assets in what we call “stalwarts”, or companies with the strongest competitive and financial positions and which we believe are best positioned to weather the current uncertainties and thrive upon a return to normalcy. We did this for a couple of reasons: 1) increase portfolio concentration in higher quality equities; and 2) be better positioned in stocks of the highest quality as a protective measure if the COVID-19 outbreak and economic downturn are more prolonged than we expect. Based on what we have seen so far, the strategy appears to be working as we expected. During the three-day rally in the stock market earlier this week, your equity positions fully participated in the rally based on comparative indexes we looked at. This is encouraging and it appears we are on the right track.

Looking forward, while none of us can forecast the market in the near term, we believe it’s probable that the stock market may remain volatile for a while and we would not be at all surprised to see a retest of the market lows in the coming weeks. History shows that sometimes these retests can take the market below the previous low. That said, it is encouraging that the Federal Reserve, the CDC, Congress, the President, and federal and state governments are all moving swiftly and taking concerted actions to address the C-19 issues. It is within this context of an economic slowdown and expected volatile markets that we made the changes on Monday which we believe should provide the highest probability of both capital preservation and a successful outcome when we come out on the other side of this unprecedented event.

As always, if you have questions or concerns, please do not hesitate to contact us.

S.R. Schill & Associates

Summary of Our Deliberations

On Monday March 23, 2020, we held the second segment of our Q2 investment strategy meeting. Our deliberations focused primarily on determining the best manner in which to implement our previously stated goal of positioning your portfolios in assets we believe offer the strongest staying power and financial strength through the recession we believe we are now in while also offering strong recovery potential when things improve. What this means essentially is we have taken actions to better concentrate your investments in ETFs containing the highest quality stocks (we refer to them as the “stalwarts”) that we believe have the strongest market positions, financial strength and sustainable cash flows.

To provide a little more detail on our changes to your portfolios, within equities, we significantly boosted your concentration to large cap stocks primarily within the technology and health care sectors of the economy while reducing exposure to smaller cap stocks which are inherently less financially secure. This change provides increased concentration within your portfolios in “stalwart” companies like Microsoft, Apple, Amazon, Walmart, Costco, Merck and Johnson & Johnson. You will see in your accounts additions of several new ETFs that give us this exposure including the XLK (technology ETF), IHE (U.S. pharmaceuticals ETF), and RTH (U.S. retailers ETF). To determine the best ETFs to implement this strategy, we thoroughly analyzed the balance sheets and cash flow strength of the top five companies in these ETFs to be sure we were investing in companies with above average cash flow relative to debt. I would also note that as part of our strategy process, we took the opportunity to streamline or reduce the number of individual ETF holdings within the models. This allows us to better concentrate your investments in the areas we believe will serve us all best in the upcoming economic and market environment.

With respect to your holdings within fixed income, we decided to concentrate for now solely on U.S. Treasury notes and bonds, which are considered the strongest bonds in terms of credit quality. We eliminated holdings within mortgage-backed bonds, preferred stocks and high yield debt as we want at this time to concentrate holdings in the highest quality credits. We are now overweight a normal allocation in the long and intermediate maturity sectors within bonds, and at a normal weight in short term bonds. In terms of portfolio macro allocation, our actions reduced net equity exposure slightly, while increasing fixed income exposure. Exposure to REITs and small cap stocks was also reduced.

Some final thoughts…. This has been an unprecedented and turbulent time for all of us. We have seen unprecedented volatility and the fastest decline by far into bear market territory in history. Making forward-looking estimates of the economy and corporate profits right now is probably more difficult than any of us on the committee have ever seen in our careers. That is why we believe investing more of your assets in blue chip “stalwarts” offers some risk protection because of their strong business position and cash flows, and with the extent of the downturn uncertain, we want to be in the strongest companies financially. We did set an investment trigger, as we do at every meeting, that would cause us to re-evaluate and most likely increase our equity exposure if there was a new, positive development with respect to a medical treatment  or vaccine for COVID-19, or an indication that new cases were peaking or coming down which would result in improved economic activity. We wish everyone the best of health and stability in the forthcoming days. 

S.R. Schill & Associates.

Update on market volatility and portfolio change

We commented last Friday on the recent market volatility driven by Corona virus fears and uncertainty. We believe these anxieties are valid but when looking at the history of the past 50 years or so, we have had multiple viral outbreak episodes from which the stock market has always recovered and moved on to higher levels. As we stated Friday, we believe this will be the case with Corona. Like everyone else, we do not know how long this will take to play out, it could be several months or more. But as history shows, these events have historically been buying opportunities. Regardless, as we stated Friday, your financial plans incorporate the impacts of market volatility and your portfolios are designed, through their diversification, to mitigate stock market risk.

With this in mind, our investment committee met on Monday to assess this situation and possible further risks it may place on client portfolios. One action we took following our meeting on Monday was to eliminate our holding in the Transportation stock ETF (IYT) and move those funds into the Healthcare Technology ETF (IHI). We did this because we believe earnings reports for transportation stocks (particularly airlines and trucking companies) may be rather ugly over the next couple of quarters and there is higher likelihood of further downside resulting from these quarterly earnings reports. By re-allocating this money to IHI, we believe we are accomplishing several objectives: 1) reducing exposure to companies that would suffer from the corona situation to companies that will benefit from it;  2) moving money into a higher and more stable growth sector; and 3) moving funds into a far less volatile sector of the market.

We also discussed a number of additional possible actions at the meeting but came to the conclusion that it was not prudent or necessary to make further changes at this time. We will be holding our 2Q investment strategy meeting later this month and at that time will re-assess the situation and take actions on any strategic rebalancing we feel may be necessary at that time.

As always, if you have questions or concerns, please do not hesitate to contact us.

S. R. Schill & Associates