Over the past few days, I have been receiving texts and emails from our clients asking about our view of what’s happening in the markets.  As I write this letter, theS&P 500 is down about 4.5% from its recent high – not fun, but not terrible.

Recent news of the Omicron variant of Covid-19 landing inCalifornia didn’t help calm the markets, and then of course our leaders sometimes lack sensitivity when it comes to the timing of their comments on the economy and inflation.

Why this isn’t like February of 2020

Let’s take a trip back in time with Mr. Peabody and Sherman in Mr. Peabody’s Wayback time machine to early 2020 and compare what was happening then, vs. what is happening now.

Back in February of 2020 we were just starting to hear about the Covid-19 virus and how deadly it could be. Here is what we faced then:

1.    We didn’t all have masks at home, and in fact you couldn’t find masks because the inventory for them was depleted, along with other essential paper products

2.    We didn’t know how the virus was transmitted so many of us found ourselves washing and disinfecting our groceries when we would bring them home from the store

3.    We didn’t have a work-from-home culture, and no one knew if we could even operate successfully that way

4.    Restaurants were almost exclusively eat-in and were not set up for takeout or outdoor seating

As a result of our lack of knowledge, by the end of March2020 we were all hunkered down in our houses and there were barely any cars on the roads. Remember?

I remember . . .

Let’s contrast March 2020 with December 2021

Now let’s get back into the Wayback machine and come back to December 2021.

We have survived and the economy has thrived even though the world has endured a horrible loss of 5,245,606 lives out of 263,934,966 known cases of Covid-19.

Here is what we know and don’t know now:

1.    Covid-19 is transmitted via droplets in the air when they are breathed in. As a result, we all have more masks at home than most of us would like to admit

2.    We don’t need to disinfect our groceries

3.    A large portion of adults and now children are already vaccinated against Covid-19

4.    Corporate America not only survived Covid-19 lockdowns, they, and most of us thrived

5.    We know we can successfully work from home, and in fact it is now the norm

6.    Both Pfizer and Moderna have the technology to create and ship vaccines within about 3 months to deal with the Omicron if a new vaccine is even needed

7.    We don’t know how easily transmissible or how deadly this new virus will be, and we don’t know if vaccinated persons will handle this new variant well

It’s normal to think this time will be like last time

It’s perfectly normal to think to yourself, “well I didn’t protect my investments last time (unless you were a client of Clear CapitalManagement), so I’m sure going to protect them now.”

So far, this time isn’t the same as last time.

Let’s get some perspective on what the markets are saying.

Here is what our Sector Aware market model told us back in early 2020 (first table), and what it is saying now (second table).

You can see from the table below that back in late February2020 the Sector Aware model was moving into Treasuries, Cash, and Gold. The rankings shown in the table go from 1 (the best ranking shown in green) to over50 (the worst rankings shown in red).

It’s probably a little difficult to see, but Materials (Gold– GLD), Treasuries (Treas), and Cash were all very green meaning they were ranked the best. You can see how quickly Sector Aware moved into these safe-haven assets starting on February 25, 2020 – well before the market bottomed on March23, 2020.

In addition, Consumer Staples, Healthcare, and Utilities were all green because they are defensive sectors where investors place their money during a declining economy.

This timely information allowed us to protect our client portfolios before the S&P 500 lost a painful 34% resulting in our most aggressive clients experiencing portfolio losses of 8% to 12%.

Now let’s contrast early 2020 with what this same SectorAware model is telling us today.

As you can see from the table above, Consumer Discretionary(expanding economy), Clean Energy, Tech, and the Broad Indices all are green, while Treasuries and Cash are just starting to move to yellow and yellow green.The defensive sectors of Consumer Staples, Healthcare, and Utilities are all orange to yellow, so investors aren’t heading for safety. Gold is orange telling me that investors don’t see an apocalypse coming.

So, what does this mean for your portfolio?

We will watch these metrics and indicators carefully over the next several weeks, and if we see the model moving aggressively intoTreasuries, Cash, and possibly Gold, we will reduce the equity exposure in your portfolio to protect against further downside moves.

Remember, when we make these kinds of moves, we must be correct twice.  Once when we reduce exposure, and a second time when we put the exposure back on. For small market drops like the one we are currently experiencing, this shuffling of assets from risk to safety and back again almost always doesn’t work out well.

For now, let’s all try to relax as much as possible until we know the full extent of the Omicron variant.

Oh, and what about the Fed and inflation?

Several months ago, I wrote an article about the effect of inflation on the markets and if we should be worried about it. You can read that article here.

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