Weakness in the Healthcare sector has been widespread on the heels of political discussions around healthcare and drug prices. Drug makers, insurance companies, medical companies and biotechs have all struggled from this. Actually, “struggled” is an understatement. While the Healthcare sector has been losing ground, one of the top performing S&P 500 sectors, Technology, has continued to outperform.
That’s just investing.
This is not going to alleviate the pain from last week’s Healthcare downturn…I get that. “That’s just investing” could be interrupted as a dismissive “Armstrong shoulder shrug,” but there is more to it.
Investing isn’t so much based on luck as it is on having a process. Using models to run different strategies is one way to have a process–one that removes luck, both good and bad. Models are central to our investing process at Monument, which is designed to consider probabilities while removing emotion and behavioral biases from the decision-making process.
Because of that, when a sector like Healthcare sells off rapidly due to speculation and emotion rather than facts, the models will never anticipate nor catch up to that kind of market action.
We can be as wrong as anyone else, but anyone with a probability-based process knows that to be mostly right, you also have to sometimes be a little wrong.
We also know that being wrong for a long time puts you out of business. Unless you are a financial news prognosticator…then you can be wrong forever. Anyway, we will be making some adjustments to the portfolio. We received a few suggestions from great clients, so thank you for those. It’s always important to hear thoughts from smart people who see things through a different lens; it really does help. Things can always be improved. The iPhone X is way better than the original iPhone because people said, “Hey, why don’t we do this?”
However, my final comment is more of a moment of introspection. You see, I can write all day long about financial and behavioral biases, and it doesn’t make me any less susceptible to them. I may catch myself more quickly than others, but I still fall victim to them.
I’ve invested in the Monument strategies right alongside clients so when the Healthcare stocks in the Growth Strategy and the Healthcare sector in the ETF strategy started selling off, I felt the pain. I felt it twice as much as the gains in other stocks. For example, Anthem (ANTM) was down -16.81% last week. Ouch.
Holy sh*t, that’s a lot. It’s one of the top things I was concerned about as an investor and as a Portfolio Manager.
However, there are a lot of high performing stocks in the Growth Portfolio, too. For example, year-to-date, here are the top five performers in the model:
AMT + 22.51%
Why aren’t I writing about those? Why am I spending time fretting over ANTM down LESS than those five are up!?
Because…losses hurt twice as much as gains, and I’m as susceptible to bias, too. I just wanted to acknowledge it.
Quick Recession and Market Thoughts
Do not confuse weakening growth with recession. Our MONCON 5 reading is consistent with our struggle to find overwhelming evidence of recession in the short term, despite the current yield curve showing some inversions. Lead times to recession from yield curve inversions are very long and widely dispersed, making them less useful for market timing purposes.
Like the equity models mentioned above, our MONCON reading keeps us from reacting…and so far, it has really kept us grounded during some scary news cycles (are there any other kind?). Remember when the world was awash in recession and interest rate panic in the fourth quarter of 2018? In case it’s a far-too-distant memory, here’s a chart from Koyfin from that time. (The top left ticker is today’s S&P 500 index level at 2907.11.)
A lot of people were panic-selling over the specter of a recession. There was a lot of emotion…and a lot of “losses hurt twice as much as gains.” However, today it seems that many people have forgotten the pain from last December.
If they did nothing, say if they had models that removed emotion coupled with a solid financial plan, they are probably pretty happy today.
However, one way to have avoided a lot of that volatility was to have been in bonds. For example, the below chart shows the relative return of the Total Bond Market ETF (BND) in red versus the S&P 500 in blue.
So that may prompt the thought, “Maybe I should have had bonds, look how much better they did.” Well, it depends on the snapshot of time you are looking at. In the graph above, it’s clear. But below, you’ll see another clear answer. Bonds compared to equity suck. Big time.
The real answer is that it makes sense to have both. The more time you have to let your money grow, the more equities make sense. The less time you have until you need the money, the more bonds make sense.
Never judge bonds solely by the yield or interest rates they pay. Yes, a portfolio of bonds should be optimized, but that’s not the only consideration. Be sure to consider the overall impact they have on dampening volatility if that is a goal in your financial plan.
Broken Record Bottom Line
As a general rule of thumb, have a plan that determines how much cash you need for about 18 months. From there, your plan should dictate your asset allocation and the correct combination of equity and bonds. Having models after the asset allocation is determined keeps emotion out of the game.
Like we just saw in healthcare, models won’t time everything perfectly, but it increases the probability that we are going to be mostly right even when sometimes we are a little wrong.
We remain at MONCON 5. Let’s see how GDP comes out this Friday…I suspect it surprises to the upside and that will reward patience and discipline.
Keep looking forward.
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