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(Extra)Ordinary Income

At Global Beta, as we analyze the current whip sawing in the market, one thing is very clear to us: the market’s unpredictability has become very predictable.

The same beast of algorithmic and index-based fund strategies that has seemingly and endlessly powered the market to new levels, ever since the market bottom in March 2009, has now seemingly become the enemy. The bad news is that it seemingly creates a lid on the market, only allowing for up days when algorithm and index trading is resetting new high and low moving averages, as well as other technical indicators, on the major indexes. In fact, the S&P 500 Index has not had consecutive up trading days since February 11-12. This has resulted in the VIX, which is an index created by the Chicago Board Options Exchange to measure volatility in the market, closing at its highest level ever, at $82.69 on 3/16.

That exceeds any trading day during the financial crisis in 2008.

During this current bear market stretch from 2/19 through today’s close of 3/18, the S&P 500 Index has fallen cumulatively more than 10% from a prior close four times before an up-trading day mixed in. The average up day has returned on average 5.81%. For context, within the first 20 trading days of the sell off from the 2008 financial crisis, which is defined as starting on 9/29/08, the S&P 500 only fell by more than 10% before an up day once in its first 20 trading days. The bottom line: this sell off has been more violent and volatile than many investors have experienced. (Data from Factset)

The good news is that as fast and harsh as the sell off has been, and could continue to be, is that same rocket fuel can work the other way, as we are experiencing from our former bull market to our current bear market. However, it is going to take more economic certainty around COVID-19 for economists and investors to properly model out the economy for the next 12 months and readjust market valuations accordingly.

Of course, Global Beta sees the two factors in what that picture will look like is:

  • the duration of government quarantines and
  • the amount of economic stimulus that gets approved.

While it’s impossible to predict the behavior of a virus that has only been studied for a couple of months, Global Beta does believe a large and meaningful stimulus will eventually hit the economy. Of course, the timing around that is critical, particularly for discretion and travel industries.

As the markets work through the uncertainty that COVID-19 and the resulting quarantines present to the global economy, Global Beta believes it is critical for investors to take advantage of some of the opportunities that the market has presented with this broad sell off.

How does one enter a volatile market when liquidity is paramount in an uncertain macro-economic environment? High quality companies with the cash to offer strong dividends and the liquidity to take advantage of strategic acquisitions is something that Global Beta believes investors should be looking for. Global Beta’s Smart Income strategy effectively screens securities that demonstrate a consistent yield over a 24-month period.

Once those securities pass that screen, the securities are revenue weighted, not dividend weighted, as Global Beta believes companies with a stronger top line offer a higher quality exposure than those that simply pay a higher dividend. Global Beta caps security issuers to a 5% exposure to mitigate concentration risk. Global Beta also actively removes any security that cuts its dividend and omits their entrance back into the index until they’re back in a financial position to raise their dividend. As an additional guard rail, we cap energy stocks to a group weighting of 3% in the index when the price of crude oil falls below its moving average.

Global Beta believes that a dividend strategy provides investors with the opportunity to participate in the market while gaining liquidity through strong quarterly dividend payments.

Justin Lowry is the Chief Investment Officer for Global Beta Advisors, in Philadelphia, PA.

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May 29, 2020