BVA Value Momentum Portfolio Strategy Year-to-Date Performance as of April 30, 2020

BVA Value Momentum Portfolio Strategy Year-to-Date Performance as of April 30, 2020

Year-to-date, the BVA Value Momentum Portfolio Strategy return is up 65.13% compared to a decline of 10.61% for the Morningstar US Market Index.

Since the start of the portfolio on January 2, 2019, the BVA Value Momentum Portfolio Strategy return is up 265.15% compared to an increase of 11.08% for the Morningstar US Market Index.

During February 11 individual stocks were forced out of the Portfolio due to a loss of momentum, as a result of the significant market decline. The decline was so broad based that I found no individual stocks meeting my criteria, to replace those which were forced out.

During March, all the remaining individual stocks were forced out of the Portfolio, as a result of the continued market decline. At the end of March, the Portfolio was positioned entirely in Volatility, Inverse Equity ETFs (Exchange-Traded Funds) and 1-to-3month short-term U.S. Treasury Bills. These investment vehicles were used in February and March to replace the individual stocks which were forced out of the Portfolio.

During April, the S&P 500 Index and Dow 30 Index each gained back about 50% of the decline which took place from February 12 to March 23, 2020. Given the significant decline during those dates, it is not unusual that the markets would gain back 50% of their losses in a subsequent rebound. However, I believe that an all clear signal cannot yet be given for several reasons.

The first reason is that the recovery bounce took place on a weak and declining volume of shares traded. In contrast, the decline took place on an increasing and stronger volume of shares traded. What we need to see is the market going up on increasing and stronger volume. This has not yet happened, indicating a lack of strong buying interest.

The Federal Reserve’s money printing and bond buying programs have increased their balance sheet by about $2.6 Trillion dollars over the last few months, to a balance of about $6.6 Trillion dollars. In addition to buying US Treasury and investment grade corporate bonds, the Fed has branched out into buying low grade corporate (or junk) bonds. These actions should primarily be looked at as an effort to stabilize the financial markets, as opposed to stimulating the economy. The objective is to keep interest rates low and prevent wholesale selling of bonds, which would drive up interest rates. There is about $180 Trillion of global debt, (vs about $80 Trillion of Global GDP). If interest rates were to rise significantly, the value of this debt would fall and increase the risk of defaults on a large-scale basis.

Another major objective of the Fed is to keep the value of the US Dollar low. Since the US Dollar is the reserve currency of the world, much of this global debt is payable in US Dollars. If the US Dollar were to rise significantly, it would become more expensive for foreigners to acquire the US Dollars to repay their Dollar denominated debt, again raising the prospects of higher defaults. Due to this situation, there is a scarcity of available US Dollars around the world, raising the possibility of foreigners driving up the value of the US Dollar as they scramble to buy Dollars to satisfy their debts payable in US Dollars. As the US Dollar rises, it makes US produced goods more expensive for foreigners to buy, further threating economic growth in the US.

To deal with the currency challenges, the Feder Reserve has recently established currency swap lines with other Foreign Central Banks. The objective is for the Fed to make US Dollars available to these Central Banks by swapping Dollars for their local currency.

Given current economic conditions, The US Federal Reserve and other Foreign Central Banks are walking a tightrope in trying to keep interest rates low while dealing with currency risks. The Fed has signaled it stands ready to print as much money as needed to deal with these problems. The risks still exist, however, due to possible unintended consequences or other unforeseen events which might arise to further upset the situation.

While the Federal Reserve and other Central Banks deal with the debt, interest rate and currency problems, Governments around the world are dealing with the extreme economic contraction caused by the global COVID 19 pandemic. The US Government has now committed over $2 Trillion in help for businesses and individuals. The big questions now are how soon can the economy be reopened, how long will it take for the recovery to happen, after the virus is contained will and when will it come back, and how soon will a vaccine be available. On the business side, how many businesses will close, when will the 30 million people who have become unemployed so far get their jobs back, and when and how strongly will corporate profits recover.

We have had a normal bounce which usually occurs after such a significant decline in the stock market. I believe, however, that further gains going forward will be harder to come by. For these reasons, I have now moved my Portfolio positions to 100% short-term US Treasury Bills, at the end of April. I will be looking to put money to work in the markets on a selective basis going forward.

I am sure of one thing. Free People combined with Free Enterprise is the best economic system ever devised. We have overcome challenges before and will overcome the challenges now before us. However, I believe it will most likely take longer to recover than many now anticipate. The stock market has a good chance of resuming its decline as events unfold. It would be a good thing for all investors to review their risk tolerance and time horizons (i.e. when do you need to use the money) relative to what they now hold in their portfolios and consider de-risking as appropriate.

Thank you and please stay tuned for more upcoming reports.

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Len Martinez is a Financial Consultant. Information in the "Bull Valley Advisor” newsletter should not be considered as investment advice or an offer to buy or sell securities. Data is derived from sources considered to be reliable including Morningstar, StockCharts.com, YAHOO Finance, FINVIZ, TipRanks, Investing.com, ECRI, OECD, gurufocus, Crestmont Research, Trading Economics and S2O. Results are not guaranteed. Len Martinez is not an RIA. The data is shown for informational purposes and should not be considered investment advice or an offer to buy or sell securities.