The Covid-19 experience was like no other, and while humans are slowly crawling out of their foxholes and re-engaging with the world, many uncertainties remain about the pace of economic recovery, the potential emergence of Pandemic Part 2 and how the equity markets are accounting for all of this uncertainty.
But regardless of what’s in store for the markets, some investment strategists believe the pandemic has changed the investing game going forward by accelerating changes that were already afoot.
“I don’t know whether the market will keep going up, but I think about it differently in that this isn’t a market anymore,” says Matthew Tuttle, CEO and chief investment officer at Tuttle Tactical Management LLC. “I think what you’ve got is the haves and the have-nots. The haves are the companies benefiting from social distancing such as Amazon, Netflix and Zoom, and who will most likely benefit in a post-Covid world. The have-nots include airlines, banks, department stores and the like.”
Tuttle manages a variety of tactical strategies in separately managed accounts, most of which have been converted into four exchange-traded funds that debuted in May. His firm’s underlying trend aggregation model analyzes trends, countertrends and fundamental statistics to find uncorrelated return streams across different asset classes.
Tuttle posits that indexes were designed to track a pre-Covid economy and aren’t set up for the post-Covid world. So he approaches investing from the standpoint of the haves and the have-nots. “We want to make sure we have a lot of exposure to the haves,” he explains, adding that he still invests a smaller portion into the have-nots to capture their returns when they undergo a reversion to the mean.
The biggest equity holdings in the Trend Aggregation U.S. ETF (TAEQ), the largest of the firm’s four new products, recently included Coupa Software, a platform for business spend management; Roper Technologies, a maker of software and engineered products for various niche markets; and Nuance Communications, a software company focused on what it calls conversational artificial intelligence solutions.
On the flip side, United Airlines was one of the holdings meant to capture upside potential from mean reversion.
Zombies
Tim Fortier, founder and chief investment officer at Drawbridge Strategies, also believes that traditional equity indexes are out of touch with the post-Covid world. His take is that consumers’ behavioral habits are changing—that airlines, retail, lodging and restaurants are among the industries directly impacted by Covid and that they will have a hard time re-establishing their pre-Covid levels.
“Getting back to 80% or 90% of lost business isn’t fine,” Fortier says. “We’re comparing numbers now that the only comparisons for are the Great Depression.”
Fortier constructs algorithm-driven, ETF-based model portfolios that seek absolute returns by capitalizing on up markets while automatically defaulting to risk-off positions in down markets. He believes changes in consumer behavioral habits are damaging certain industries and potentially weighing down indexes with a lot of dead weight that could hamstring traditional passive investing.