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Uncertain Times Give Investment Club Experiences in Market Volatility

April 6, 2020

For just over a decade, St. John Fisher College’s Investment Club has managed a portfolio of investments. In the last four years alone, the Club had one of the longest market peaks in recent history, only to turn downward at a rapid rate, due to the uncertainty brought on by COVID-19.

Under the support of advisor Dr. Alex Abakah, the club made use of the new Bloomberg Terminals in the School of Business to track their investments in real-time, using the same technology as professionals on Wall Street.

As they saw their investments experiencing a downward spiral this March, the group drew knowledge from courses including Money and Banking and Macro Economics, along with internships in the field, to assess the long-term impact of the virus on the economy and their portfolio.

Below is a 2020 Outlook produced by club members Nathan Fuller, president; Anthony Kousmanidis, chairman; Peter Francomano, portfolio manager; Cooper Swartwout, chief marketing officer and incoming vice president; Jack Mott, chief information officer and incoming chief operating officer; Matthew Jeffries, chief financial officer and incoming president, and Andres Ramirez, member and incoming portfolio manager.

“We learned that we should continue to focus on diversifying our portfolio if we want to succeed through the ups and downs of the market,” said Fuller, a marketing and psychology major who will graduate this May. “We are also learning that our focus on long-term investing will only be more beneficial for us in the end of this crisis because we stuck with companies that we see value in rather than trying to make a quick buck.”

2016 to Now

To put the recent losses into perspective, we need to take a brief look at the market over the past four years. Since the 2016 election, the U.S. markets have seen an 8% gain, peaking at an impressive 43% gain just three months ago. These past four years topped off one of the longest bull runs in recent history, making many people fear that a recession was imminent. The novel coronavirus pulled the trigger on that looming fear by causing thousands of businesses to suspend operation, and millions to lose their jobs, wiping out almost all gains over the previous four years.

COVID-19’s Effect on the Economy

Life is much different than it was just two months ago. The world has been swept by a pandemic and it has disrupted industries from grocery stores to airlines. The market has taken such a hit worldwide that the U.S. government has released the CARES Act, a $2 trillion relief plan for corporations, health care industries, and individual checks of up to $1,200 to every U.S. resident. Looking at the numbers, how has this affected the market and the Investment Club portfolio?

Portfolio Comparisons as of 03/27/2020

Portfolio Comparisons
*as of 03/27/2020
Fund/IndexYTD Growth
SJFC Portfolio -28.23%
S&P 500 -33.92%
DOW -37.09%

Year to date, the Investment Club Portfolio has outperformed the Dow Jones Industrial Average and the S&P 500 as shown above. This is one way that we can benchmark our portfolio’s performance. Although we lost nearly 30% through this turmoil, we have beaten the market averages, which is what these indices represent. This tells us that our efforts to diversify the portfolio pay off in times of crisis.

These are extremely uncertain times. There is rampant volatility in the market and things are changing every day. We hope to reach the end of this very difficult situation soon, but in the meantime, we see many potential opportunities for growth in the market during these down times. Companies that might have been fairly valued or slightly over-valued at the end of 2019 may be at a discount right now. This is not because the companies have performed poorly, but simply due to fear in the market and short-term effects on the companies’ operations. We would argue that there are many securities out there that were oversold and created market inefficiencies that could be exploited for value plays. For evidence of this fear-driven market, we can look at the market movements on March 24. With anticipation of the CARES Act passing that week, the market shot up 11% in a single day, the greatest increase since 1933.

Buying Opportunities & Outlook on the Fisher Portfolio

The Executive Board has a positive outlook for our portfolio. We have outperformed both the Dow Jones Industrial Index and the S&P 500 Index. We put in extensive research both on a bottom-up investment style and a top-down investment style when pitching a security. We are confident that all of our investments are good investments and can weather the storm from COVID-19, bringing us more potential returns. As a club, we discuss what is going on in the market and look for good opportunities based on overselling, and market inefficiencies, whether it is dollar cost averaging or investing in other securities.

Currently, we see some opportunities across all sectors due to the extensive sell-off. Specifically, we see previously overvalued sectors like Technology sell off sharper than other sectors, this created major buying opportunities. Specific positions in our portfolio, like Apple Inc. (NYSE: AAPL) and Microsoft Corporation (NASDAQ: MSFT) still have a healthy upside this year with product launches of the Apple iPhone 12 and Microsoft Surface Neo during the holiday season. With both companies, the production risks due to COVID-19 are still discernible. However, with China lifting their lockdown, production will commence once again for the two products. Our positions are 5.41% and 6.80% of the portfolio, respectively.

Other opportunities can also be seen in the Semiconductor industry with Taiwan Semiconductor (NYSE: TSM) and Advanced Micro Devices (NASDAQ: AMD) having the strongest upside potential. We currently do not have these positions in our portfolio and see potential long-term buys for these two companies. A sector that has been in a long-term bear market that now shows more upside is Oil & Gas Majors. Companies like British Petroleum (NYSE: BP) and Royal Dutch Shell (NYSE: RDS.A) are industry leaders and have business segments that are now adapting to the increasing environmental concerns. Right now, both companies are preparing for a future that is not solely dependent on oil and gas. Altogether, the market is in a better place to buy with the highest possible returns still being within the technology, semiconductor, and oil and gas industries. One industry that we will not be looking to increase exposure to is Consumer Staples since they have fared much better in the current market environment.

The Reaction of the Federal Reserve and U.S. Government

As with any major disruption, the Fed and other parts of the U.S. government have plans in place to mitigate the negative effects on the economy. To start, the Federal Reserve reduced interest rates to between 0% and 0.25% with an additional $700 Billion dollar quantitative easing program to shelter the economy from the coronavirus. The quantitative easing includes $500 billion of Treasuries and $200 billion of agency-backed mortgage securities. The Fed’s purchases began Monday, March 16 with a $40 billion installment. The financial regulators also slashed the discount window of 125 basis points (BPS) by 0.25% and extended the length of the loans to 90 days among other preventative actions.

The U.S. government’s actions were much more publicized. On Wednesday, March 25, the Senate passed a $2 trillion Stimulus Plan, and two days later, the House passed the bill. This package includes:

  • Direct payments of $1,200 to most individuals making up to $75,000, or $2,400 for couples making up to $150,000. Each dependent child increases the amount by an additional $500. The amount decreases for individuals with incomes above $75,000, and payments cut off for those above $99,000.
  • Expanded unemployment benefits that boost the maximum benefit by $600 per week and provide laid-off workers their full pay for four months. Eligibility is extended to independent contractors and the self-employed.
  • $367 billion in loans for small businesses, $150 billion for state and local governments, and $130 billion for hospitals.
  • $500 billion in loans for larger industries, including $25 billion for passenger airlines; $4 billion for carriers; $3 billion for aviation contractors, and $17 billion for “businesses critical to maintaining national security.”
  • There are more actions included in this bill, which can be found in this CBS News story.

These are tough times. If you are fortunate enough to have discretionary spending, it may be a great opportunity for you to enter the market. If you are struggling through these times, you are not alone, and we hope that the many government assistance programs will help you stay afloat. The Investment Club looks forward to a future of health, normal routines, and positive returns. #SalernoStrong