Manager Who Timed March Bottom Cuts Risk With ‘Alarm’ Sounding
(Bloomberg) -- Back on March 20, three days and less than three percentage points from the stock bottom, Pacific Life Fund Advisors decided it was time to up their portfolios’ risk exposure. Now, the $32 billion money manager is reversing that trade.
The way Max Gokhman, the firm’s head of asset allocation, sees it, there’s no way stocks are fairly valued with the S&P 500 Index back near January levels and the economy significantly worse off than it was then. With coronavirus cases climbing, fiscal stimulus in question and political risks rising, negative catalysts abound.
“It’s kind of like the markets had the alarm going off, back in June they pushed the snooze button, and I think that alarm is going to start going off again,” Gokhman said from Newport Beach, California. “That’s going to create additional volatility and additional downside risk.”
Timing the market is an undeniably hard task and few attempt to do so, especially after countless pundits and strategists were burned just a few months ago when the quickest ever bear market morphed into an unrelenting rally. Still, Gokhman was among the rebound’s first true believers, remaining optimistic on the comeback until growing skeptical in June.
Now, Pacific Life has pulled the plug. Across a suite of mutual funds, the firm just dialed back its stance on risk from 7% overweight to just 1% overweight, a move that Gokhman calls a “big reduction.” The asset classes that saw the largest cuts across the typically aggressive portfolios include U.S. large-cap stocks, U.S. real estate investment trusts (REITs), and EAFE (which stands for Europe, Australia and the Far East) value.
As for why the money manager is still slightly overweight risk? Gokhman says, “There is something to say about not fighting the trend.” Yet if tensions over getting another fiscal stimulus bill passed were to rise, or coronavirus cases continue to increase at a pace that stimulus won’t be able to offset, he says they’d take action and possibly flip to outright underweight.
After a run for the S&P 500 that hit 45%, turning the benchmark’s returns positive in 2020 for a moment, stocks have largely been stuck trading sideways in a 200-point band amid rising cases of Covid-19 in hot spots around the country. The index dropped 0.9% Thursday as of 12:54 p.m. in New York after Florida reported a daily record in fatalities from the virus.
These statistics are worrisome to Gokhman, but he’s also concerned about the prospects for another comprehensive fiscal stimulus package from Washington. Back in March, the size and speed of stimulus was the reason Pacific Life turned bullish. Now, Gokhman likens the outlook for stimulus to fish in an aquarium, particularly with certain elements of the CARES Act due to expire at month’s end.
“The Fed can filter the water and make sure the water is clean, but if you don’t have food, the fish are still going to die,” he said. “The fiscal stimulus was that food. Well, the amount of food we’re going to be getting going forward is going to be a lot less and there’s going to be a lot of fights over whether to even give any food or which fish to give food to. That’s my take on July stimulus.”
As for those who are still optimistic because of an extremely accommodative Federal Reserve, Gokhman has a message:
“For folks who say the Fed put is going to keep us moving up, they need to reexamine the definition of a what put option is.”
In his view, that so-called put -- or the level seen as the point the central bank would step in and provide even more stimulus -- is certainly not at 3,200 for the S&P 500.
“I don’t even think it’s at 3,000 before that put does get activated,” Gokhman said. “It’s a floor, not magical juice that keeps you going up and up.”
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