| May Days versus May Day
This is Jim Lowell, Editor-in-Chief of the Fidelity Investor, with your regularly scheduled Hotline, Thursday, April 30, 2020. There are trades recommended in my FI Growth and Growth & Income as well my VIP Annuity Growth and Annuity Growth & Income model portfolios, effective today. I will detail these at the end of this message. The Markets For the year through April 29, the S&P 500 is down 8.4%—below correction territory; the Wilshire 5000—the broadest measure of our domestic market, is down 9.1%; the EAFE index—my preferred broad measure of international markets, is down 17.5%; and the Bloomberg Barclays U.S. Aggregate Bond Index—my go-to broad measure of U.S. investment-grade bonds, is up 5.2%. Our Portfolios Over the same time period, my rankings-based, quantitative Global Quant Growth portfolio is down 13.8%, and my Global Quant Income portfolio is down 0.8%. My Growth portfolio is down 5.8%, my Growth & Income portfolio is down 6.2% and my Income portfolio is down 5.7%. Annuity Growth is down 5.7%, and Annuity Growth & Income is down 5.8%. Month-to-date, my new Factor+ portfolio is up 11.1%. Market Watch Your May Issue is one day away. Normally, I’d keep this missive short—but there is a lengthy list of trades (detailed in last week’s Hotline, and to be detailed in your May Issue), which are effective today—as well as my overall, ongoing thinking… So I’ll get into them. Hope for Gilead’s antiviral drug mixed with Fed Chair Powell talking up infinite stimulus aided the markets this week. Add re-opening dreams before re-opening realties set in, and you have the stuff that the multi-week global rally has been made of and is banking on. Result: There’s a trader’s sense that the worst is behind us, and getting back to normal may be less tricky than the consensus thinks. So, trader-wise, hope is like a fear fire extinguisher; let’s hope it remains so. But I think investors are right to be more cautious than optimistic. I know I am. Why? Hope is not an investment plan nor discipline. And any proposed and best laid plans are subject to revisions that could cause more market drama or dramatic revisions, which could be even more unnerving in the near term. Relatively good news: As I noted last week, this week, we didn’t have to rely on hope alone; the preponderance of earnings and more relevant (i.e., timely) economic data are delivering a view of a different world at hand and ahead—a world fraught with existential, economic and market risk… A greenhouse where long-term investment opportunities are sown. To be clear, the data we’re getting does not provide forward looking clarity… But it is the beginning of putting the frame around the picture of how bad things are and may yet get. What we got: Consumer confidence (April), FOMC two-day meeting with their interest rate announcement and Chair Powell’s press conference. We also got personal income-spending-savings (March). The sum of those parts: We downshifted from a slow growth economy to a no growth economy with Q1 GDP (thanks to March’s swoon) coming in at negative 4.8% compared to Q4’s read of a positive 2.1%—the biggest decline since 2008… And Q2 is likely to be much worse—down 30%-40%. Tomorrow’s slate: Chicago purchasing managers index (April), manufacturing purchasing managers index and ISM reports (April), construction spending (March) and car sales (April). Next week: Factory orders (March), manufacturing purchasing managers index (April), ISM service sector (April), ADP jobs (April), jobless claims (May), nonfarm payrolls jobs report (April), unemployment rate (April) and average hourly earnings (April). In terms of our economy, here’s a thought: No matter who wins in November, we can all win if the economy gets back on track—and the best rail to run on for years to come would be a massive infrastructure rollout. Of course, a “new deal” on health care and even the food chain together with more equitable access to technological advancements are necessary inroads… Part and parcel of being a 21st not a 20th century economy… But unlike Back to the Future where you don’t need roads, we desperately need roads, bridges, water, sewer and energy upgrades… From our biggest cities to our smallest hamlets. On that note, of all the reading I do over the weekend, this one stood out to me: Out of pandemic crisis, what could a new New Deal look like? Here and now: Tentative, small-scale re-openings are only just being considered (and trialed in a few counties, states and countries). Markets have rallied significantly off the bottom on the hope that these re-openings will be successful—and our model portfolios have participated in that rally to a significant degree with significantly less risk. Since I think the risk of a recurrence of the virus in these early-opening locations is real, and not fully appreciated by the markets, I’ll err on the side of safety rather than hope. As I’ve said all along, I’ll stick to my diversified investment discipline and remain data driven; my cautious and prudent approach. I am fully cognizant that we don’t need to wait for all counties in one state, or all states to re-open—or all countries overseas to re-open—but I’d need to see how some of the most meaningful state and country economies fare as they attempt to re-open. Some big unknowns: - Antiviral drug driving mortality rates lower
- Re-opening not triggering the need to re-close
- Second wave
- Fall return
- Current virus morphing to the extent it thwarts all prior proposed solutions
- Fear of supply chain disruptions leading to even greater disruptions in supply chain
- Unemployment and economic contraction protracting into and through third and/or fourth quarter
- How consumers and businesses behave in “COVID world” in 2020, 2021 and beyond
Yes, the Fed stimulus and global stimulus provide a safety net underneath the global economies… But the fact that they are issuing more, not less stimulus, suggests we have more than a way to go in ensuring the net is wide and strong enough… Lasting enough, progressive enough to stimulate a return to economic progress rather than retreat. Meantime, the pattern of buying on optimism and hope and selling on disappointment and fear remains the dominant momentum trend. To the extent that the spread of the virus and the mortality rate don’t accelerate, slow progress toward greater market stability can be had. However, until a vaccine is secured, no market is immune to a dramatic downturn. My model portfolios (inclusive of today’s recommended trades) are prepared to battle through to better times—based on what I know about how to manage dramatic near-term risks (that may or may not protract into intermediate-term risks) as well as what I know about how to pursue long-term returns. FI Model Portfolio Trades I am recommending trades out of two stalwart, long-term outstanding and inimitable managers in order to add to other long- and near-term adept managers. I am recommending selling Joel Tillinghast’s Low-Priced Stock (FLPSX) in my Growth and Growth & Income model portfolios and Will Danoff’s Contrafund (FCNTX) from Growth & Income. Overall, to accomplish the goals that I think make the most sense (and I’ll get to these in a minute), I needed to make hard decisions and even harder cuts; my cuts do not reflect my sense that either Tillinghast or Danoff have lost their stock picking touch. Instead, it reflects my overriding sense and sensibility of where I think we are and will be heading as we navigate through these uncertain times to hopefully better climes. And to be clear, both Contrafund and Low-Priced Stock remain Buy-rated by me—and are each found inside my rankings and rules-based Global Quant Growth portfolio—and you know my longstanding advocacy of each managers’ superb stock-picking skills sets and general risk mitigation components. But the world has changed, not for the better, for a global mid- and small cap value manager like Tillinghast, and I think Danoff’s U.S.-centric large cap growth tilt has found a more concentrated complement and counterpart in Stephen DuFour at Focused Stock (FTQGX). Another trade point to make: While my most aggressive and long-term oriented Global Quant Growth holds 10 managers at a time (ensuring global diversification at all times), my FI Growth, Growth & Income and Income model portfolios have been narrowing the number of managers over the span of the last 12 months, and they are drawing more into the U.S., while at the same time beginning to build a China region stake. Post-trades, my more concentrated but still globally diverse net will be cast by more managers with specific skill nets; casting in the sea they know best rather than trying to net the world in their catch. With the coronavirus’ global economic duration and toll, as well as the toll’s duration, still not only unknown but unknowable, I want to maintain our high levels of diversified defense, while simultaneously positioning for a rebound that may be a year or more away… Or as close as around a quarter or two’s corner. To do so, I am increasing my weighting in jockeys who have ridden the recent race to the bottom and rallied off of that bottom—a price pattern I suspect we’ll revisit more than once on a forward-looking basis—better than their benchmark and peer group. I also want to concentrate more in the capitalization range where liquidity is less of a concern to me—domestic and global larger-caps—with an increased emphasis on regions whose economies are most likely to emerge relatively intact and good to grow, which in my view is the U.S. and China (and economies that cater to them). I also want to place greater emphasis on my favorite defensive global growth sector: Health care. And I want to lend more buying power to Jed Weiss at my ex-U.S. globetrotting pick: International Growth (FIGFX). And yes, regarding Government Cash Reserves (FDRRX) in the Growth & Income portfolio, I did trade out of it on March 6 (placing the proceeds into FBND). But it feels like years since that trade, and markets have changed more in a few weeks than in most years, so I now want to diversify our bulwark and have the added advantage of keeping some powder dry for long-term opportunities. (Note: Fidelity’s Money Market funds are excluded from Roundtrip Violations.) Here are the FI and VIP model portfolio trades, which are effective today, April 30: Growth Sell Low-Priced Stock (FLPSX) and divide the proceeds into four parts and deploy those parts to purchase more shares of the following funds: Focused Stock (FTQGX), China Region (FHKCX), International Growth (FIGFX) and Select Healthcare (FSPHX). I am not increasing our equity stake—I am diversifying it. Growth & Income Sell Low-Priced Stock (FLPSX) and divide the proceeds to execute the following: Add to our stake in Select Healthcare (FSPHX) and re-purchase Government Cash Reserves (FDRXX). Sell Contrafund (FCNTX) and use the proceeds to purchase Focused Stock (FTQGX). I am moderately decreasing our equity stake, while also diversifying it. Annuity Growth - Sell VIP Balanced (FAVBB) and add the proceeds to VIP Health Care (FAVHC).
- Sell VIP Floating Rate High Income (FFLAC) and purchase VIP Bond Index (FBIPC).
- Sell VIP Growth & Income (FAVGI) and VIP Growth Opportunities (FAVGO) and purchase VIP Growth (FAVGR).
- Sell VIP Contrafund (FAVCF) and equally divide the proceeds to purchase the following: VIP Government Money Market (FAVMM) and VIP FundsManager 50 (FMPFC).
Annuity Growth & Income - Sell VIP High Income (FAVHI) and add the proceeds to VIP Health Care (FVHC).
- Sell VIP Floating Rate High Income (FFLAC) and purchase VIP Bond Index (FBIPC).
- Sell VIP Growth & Income (FAVGI) and VIP Growth Opportunities (FAVGO) and purchase VIP Growth (FAVGR).
- Sell VIP Contrafund (FAVCF) and equally divide the proceeds to execute the following: 1.) purchase VIP FundsManager 20 (FMPEC) and 2.) add to the VIP Government Money Market (FAVMM) holding.
Until next Thursday, or if the Dow moves 10% in either direction, this is Jim Lowell thanking you for your membership and helping you secure your financial future. Sincerely, 
Jim Lowell  Like Jim on Facebook
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