Weekly Market Commentary

March 23rd, 2020

Chadd Mason, CEO The Cabana Group

U.S. Economy and Day-to-Day Life Comes to a Complete and Sudden Halt

On behalf of everyone here at Cabana, I want to wish our clients, investor partners and friends good health and peace at this time. What we are collectively facing as a nation is in many ways unprecedented. Never has our economy and day-to-day life come to a sudden and complete halt. In the coming months, we will see many of our neighbors lose their jobs and businesses. In addition to a very real fear of disease, we will soon be forced to         confront the fear of being unable to meet financial obligations and for some, feed our families. As always, the most susceptible are the poor and disenfranchised. Our thoughts are with everyone being impacted by COVID-19.

More perspective from those who came before us:

With that said, there is always hope and perspective when we look to the past. Our parents, grandparents and great grandparents have given us a roadmap to deal with real adversity. They faced challenges, which at first must have seemed impossible. World wars, drought, depression and even sickness. In 1929, my great grandfather died of pneumonia. He caught a cold while duck hunting. There weren’t antibiotics to fight the infection in his lungs that developed over the following week. He was 35 years old and left behind a wife and four children. One of his children, my precious Mimi was four years old. The country was already in recession that January and would be plunged into the Great Depression nine months later. I cannot imagine how scared my great grandmother must have been. She was poor to begin with and suddenly faced with being alone and finding a way to support her children at the worst possible time in history. Except she wasn’t alone. She had her family and his. His brothers and sisters stepped up and made sure food was on the table and the house had heat. My grandmother told me story after story about her time as a little girl with her aunts and uncles. Her Uncle Adrian had a cement porch and he gave her a ball to bounce. They made her feel special and taken care of. She was part of something bigger than herself and she was loved. I think that time in her life was one of her favorites. She didn’t know how close to the edge she really was. My family isn’t the only one that faced very difficult times. All families did. World War II came, and men left home and fought together for their country. They died for it. During the first half of the twentieth century, polio crippled children across our country. During warm summer months the country was regularly quarantined, and each new illness brought fear that it might be polio. Since then, we have seen men sent to fight overseas time and again for popular and unpopular reasons. We have seen our major cities erupt in riots and fire. We have seen AIDS wipe out an entire generation of some of our most creative and talented. We have seen our nation attacked on its own soil by terrorists in an act so shocking it is forever etched on the minds of all those old enough to remember it. We saw our financial system collapse, resulting in a second debilitating recession within eight years. People who invested in 2000 did not make a dime for an entire decade.

We made it through all those things, and we will make it through this. The common thread among these events is that they affected all people. Just as the generations before us have shown, when we are all threatened, regardless of the source, we step up. We come together like no nation of people in the history of the world. When the times are the very darkest, Americans are at their best. This will be true again. Today, let us all commit to one another to be our very best and to help those of us less fortunate. As Mimi has always shown me, it’s not about the money either.

Market Update:

This past week, the stock market continued to fall in response to the inevitable loss in productivity and resulting corporate earnings. Equity indexes are down more than 20% for the month and more than 30% for the year. The speed and depth of this decline over the past six weeks is beyond remarkable. Never has something like this occurred from a market top, and it is further evidence of just how suddenly investors became aware of the extent to which this pandemic would damage our economy. If you were ever looking for the definition of a black swan event, this is it. Even more troubling than the fall in stock prices, is the decline we are seeing in all types of bonds, particularly those perceived as “safe” assets. Investment grade bonds, municipal bonds and even treasuries have been pummeled (while treasuries have since rebounded). In just three weeks, investment grade bonds are down 18% and municipal bonds are down 15%. High yield bonds have been hit even harder. Investors are concerned that many businesses and municipalities will not survive or will be forced into bankruptcy. This situation has become so severe that there is now very little or no market at all for these bonds. The Federal Reserve has announced a plan to backstop these assets to encourage banks and other financial institutions to buy them. Additional “unlimited” financial support was approved early this morning. We will have to see whether our central bank can push enough liquidity into that market to right the ship. Of all the things I have seen over the past month, the selloff in normally “safe” bonds is most concerning. If investors are unwilling to take positions in the bonds of the very best companies and communities, they are certainly going to be unwilling to buy stocks. Many retired people rely on these investments, and the continued unabated decline in their price needs to be resolved quickly.

Target Drawdown 7, 10, 13 and 16:

At Cabana, we modified our current allocation on Friday, March 20. All portfolios remain allocated to bearish conditions and are invested primarily in U.S. treasuries, U.S. dollar and gold. They also have a dividend stock position if the market suddenly improves. Friday’s modification was made to shorten the duration of our treasury positions in response to the extreme volatility we have seen in interest rates all along the yield curve.

I am pleased to report that our core Target Drawdown Portfolios (Target Drawdown 7, 10, 13 and 16) have remained within, or close to, their target drawdown parameters. While the target drawdown percentage is not guaranteed, it is very comforting to see our algorithm performing as designed under these conditions.

Target Drawdown Income 5 and Efficient 10:

As of this past Friday, we have taken steps to address drawdown exceeding our parameters in the Target Drawdown Income 5 and Efficient 10 portfolios. These portfolios run on a two-scene version of our algorithm and are designed to provide tax efficiency and income. They respond more slowly to changing conditions. For this reason, they did not reallocate and remove risk as quickly over the past month.

Additionally, the Target Drawdown Income 5 is made up of income-producing assets, such as dividend-paying stocks, bond ETFs and bond mutual funds. As set out above, these assets have dropped precipitously along with stocks this month in the face of panic selling across all markets. Historically, these types of assets would provide stability and perform well under deteriorating market conditions.

While the current state of events is unlike anything we have seen and there is a strong likelihood that traditional asset class relationships will return, we are not in the business of waiting and hoping that we are eventually right. We have reallocated both the Target Drawdown Income 5 and the Target Drawdown Efficient 10 to the same investments found in our other portfolios. This allocation represents our best judgement for preservation of       capital and performance should conditions persist or worsen. Additionally, we will begin using our standard fivescene algorithm with both of these portfolios going forward or until further notice. We believe that this modification will bring them in line with our other portfolios and provide the best opportunity for gains when the market bottoms and turns up. The current allocation has a dividend yield of 2.1% and is particularly attractive in this environment. This will allow income to continue to be generated for those investors seeking it. It should be noted that receipt of dividends is a huge advantage in times like this.

In Closing:

I would like to reiterate my profound thanks to the Cabana team who is working all hours of the day to update our Cyclical Asset Reallocation Algorithm (CARA) and integrate in real time what is occurring in the markets. This type of machine learning will allow us to continue to build and provide the very best asset allocation models available – no matter what is happening in the world. A special thank you to our operations and trading teams for meeting the challenge of managing more than $1 billion in assets during what can only be described as hurricane conditions. I have never been prouder to be part of Cabana.

I also want to thank our advisor partners who are fighting the good fight with us to protect their clients’ money. Their communication with us and the downstream investors is invaluable. Together we are all going to come through this better and stronger than ever. We may be battered and bruised, but we are very much alive and ready to fight another day.

IMPORTANT DISCLAIMERS

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.

The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be   representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.

The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period.  Visit www.fa-mag.com for more information regarding the ranking.

No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

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