June 2020 Market Update

Matthew Ferratusco |

The recovery narrative changed in June as states previously successful in warding off large coronavirus outbreaks began to experience a sudden surge in infections. The month started strong, with the market gaining more than 6% in the first six trading days. The surge in infections paired with the Federal Reserve’s unwelcomed warning of a slow recovery prompted a single-day 6% shellacking for the S&P 500 on June 11th. From there, the market sputtered on to finish in positive territory. The Lyons Tactical Allocation composite gained 0.57% and has gained 17.92% YTD. The portfolio closed the second quarter largely unchanged from May, with a small hedge in place and otherwise fully invested in equities.

Despite the June 11th decline, volatility for the month remained relatively stable. Daily moves greater than 1% in either direction remained at 11, equal to May’s count. Daily moves greater than 2% remained low as well, growing from three in May to four in June. For perspective, this figure stood at 18 in March, accounting for 82% of trading days that month. The relative decline in volatility alongside a strong market rally has shifted allocation strategies more fully toward equities. By now we expect most tactical managers are allocated accordingly, as demonstrated by the recent strength of our benchmark and peer groups. However, the large swings in equity prices and volatility levels in a relatively short time period are likely causing wide dispersions in trigger points that would determine future allocation changes. We believe tactical models may be “on edge” in the near term. LTAP remains within its hedging window and is positioned to increase hedge size to buffer downside risk in the coming months should conditions deteriorate again.

The next major catalyst for markets comes in July as second quarter earnings season gets underway. Forecasts for the quarter have been revised down dramatically, possibly setting up for a low bar and a large number of beats to drive markets higher, or at the least, justify current multiples. We expect the impact of the coronavirus to continue favoring growth, technology and healthcare. We have positioned our equity portfolio to benefit should this trend continue, while also balancing with exposure to cyclical names we expect to emerge stronger than before as the consumer regains strength. Together with our hedging capability and tactical model, we believe we are well positioned for balanced risks in the near term.