What Happened to Our MONCON Recession Planning Tool?

Our MONCON recession planning tool didn’t work for the COVID recession but that does not mean it’s useless and certainly does not mean we’ve stopped using it.

Let’s review.

MONCON is a great tool. In case you forgot what it does and how we use it, see this recession plan blog post. It’s from 2018, but MONCON has not changed since then.

How our recession planning tool works

As a quick review, MONCON helps us make decisions on reinvesting cash in our equity models (and client portfolios). MONCON 5 is a normal economy while MONCON 1 is a full blown recession.

We do not take any action on a move from MONCON 5 to 4…backtesting shows that there is a 50/50 chance it moves back to MONCON 5.

MONCON 4 to 3 is a trigger and prompts action. At this level, we move towards accruing cash.  As the MONCON level decreases, it’s highly likely that our different equity models will trigger alerts to sell individual securities. When MONCON is 3 or lower, we keep the sale proceeds in cash rather than buying new securities.

We continue to raise and stockpile cash through MONCON 2.

At MONCON 1, we are most likely in a full-blown recession—which is also when we start redeploying cash into securities that are screened as “BUYS” in our models.

Said differently, “buy low.”

Remember, our MONCON recession planning tool and our models are designed to guide our decision making process in a way that removes our emotions and biases, especially in the face of the news cycle.

MONCON evaluates 10 standard economic inputs that tend to indicate if the probability of a recession is increasing. It’s impossible for MONCON or any model to be a crystal ball for predicting “event-driven recessions” like COVID or 9/11.

But it still seems very useful for signaling when to put any cash back to work–and that’s what we used it for.

Using MONCON during COVID

While the market selloff and the MONCON 5 to 1 shift happened quickly (in fact, faster than ever), we did raise some cash as model “sell” triggers were hit.

Any cash that was raised was placed back to work in new securities during MONCON 1. Now that two of the ten model inputs have flipped from “recession” to “expansion” as of the last model update, we have now moved back up to MONCON 2.

And I suspect we improve to MONCON 3 versus sliding back into 1.

Models aren’t perfect and ours are no exception, but they don’t suck either. We think they helped us make good decisions based on facts and data rather than emotion…which is one key to success.

Keep looking forward.

 

What’s Next?

 

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