Alpha Power Investing Newsletter

April 1, 2020

A Long-Term Perspective Matters Now More Than Ever

Unprecedented in our lifetime. That is the only proper perspective for the current "state of affairs" when you consider how quickly we got to a point that involved:

  • A raging worldwide pandemic.
  • A third of the world's population essentially on "lock down".
  • Large swaths of U.S. businesses slowed or, in many cases, shut down completely.
  • An ongoing oil price war (which would normally be a primary story but which is presently little discussed).

Meanwhile, in the financial markets:

  • The benchmark S&P 500 Index fell from an all-time closing high to a level -34% lower in just 23 trading days.
  • U.S. treasury securities advanced sharply while virtually all other income-related securities (investment grade corporates, high yield corporates, municipals, mortgage-backed, preferred stocks, utilities, REITs, etc.) suffered sharp declines and/or extremely abnormal price volatility.
  • Crude oil plunged an incredible -57% in just 19 trading days.
  • Gold moved roughly $380 an ounce (roughly $190 down and $190 up).

Focus on the Long-Term and Having a Plan
Just one month ago in our newsletter we addressed the dangers of simply putting all of one's money into the stock market on a buy-and-hold basis. Not only can there be significant bear market declines along the way as we have just seen, but the market can also go sideways for many, many years at a time (i.e., 1927-1949, 1965-1982, 2000-2012).

Additionally, we highlighted the fact that while the stock market was in a confirmed bull market (ah, those were the days) the high P/E ratio was a warning sign that trouble would come somewhere along the way. Virtually no one foresaw the amount of trouble the world population and the financial markets would experience in the month of March. Acting defensively in the face of an unrelenting decline is simply human nature and every once in a while, capital preservation becomes the top priority. Still, many investors reacted to the market volatility during the recent selloff by selling in a panic.

Yet, this raises an interesting point - that being the importance of having a well thought out financial plan and maintaining the discipline to follow that plan. This once-in-a-generation period of turmoil also reminds us of why it makes sense to employ a variety of investment strategies, particularly ones that have a relatively low degree of correlation to one another. While some may remain in the market, others may exit and serve to reduce the overall portfolio volatility. As long as each strategy is based on sound time-tested logic, then over the long-term they can work together to maximize the tradeoff between reward and risk.

The strategies offered by Alpha Investment Management are all rules-based, calendar-driven strategies based on seasonal and cyclical trends that have been at work in the markets for many decades, and are intended for long-term investors. Those strategies that invest in the stock market undeniably took their lumps during the recent market collapse. Nevertheless, in focusing on the big picture, we expect the trends that we exploit in our strategies to reassert themselves again in the years ahead and believe that the action so far in 2020 is essentially a one-off event. We believe that investors who maintain their long-term discipline will be rewarded moving forward.

To better understand our confidence please consider the following:

  • One thing we look at is five-year rolling returns. Obviously, a lot of volatility can happen along the way, but since 1949, the Dow Jones Industrial Average held during November 1 through May 31 every year for five years has showed a gain during 64 out of 66 five-year rolling periods, which is 97% accuracy. While this did not help us during the month of March 2020, the fact remains that we are not aware of a more consistently reliable long-term trend and we encourage investors to continue to employ this trend in the years ahead.
  • Since the S&P MidCap 400 Index was first available in 1981, if we look at November 1 through May 31 performance over each rolling five-year period, we find that 100% of all five-year periods have showed a gain. We see no reason why this will not hold true going forward.

As a reminder, the proper way to measure the long-term performance of any investment strategy is to consider total return from bull market high to bull market high and from bear market low to bear market low, i.e., across a full bull/bear cycle.

Jay Kaeppel
Director of Research
Alpha Investment Management, Inc.

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.  

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