December 2020 State of the Fund Report

Posted on December 17th, 2020

Vaccine News Inoculates Market Against Accelerating Pandemic

November began with a dramatic rally as worries about election turmoil subsided. Soon after, news of very strong trial results for multiple COVID-19 vaccines greatly strengthened investor sentiment and dominated market action since. The news came at an opportune time since the pandemic spread was also accelerating into the holiday season, forcing new health restrictions and causing further economic strain for millions. The hope that medical intervention for the pandemic was within reach helped loft markets to new highs even with the likelihood of dire economic consequences in the near future.

Even before the election, markets had already begun to jump higher as the turmoil many feared never manifested. The election results were also a positive signal for investors with Democrats unable to make major gains, leaving a high probability of a divided government next year — historically a good thing for stocks. Against this improving backdrop, news that Pfizer’s vaccine trials showed a 90% efficacy was a massive shot in the arm for markets, spiking the S&P 500 well into all time highs. Markets fluctuated in the following weeks as investors scrambled to digest the information and reallocate their investments; but the news has had a lasting effect in easing pandemic uncertainty.

The takeaway for investors was clear: however bad the pandemic may become, it now has a firm end date once the vaccine can be distributed. This sentiment was amplified throughout the month with more good news as two other vaccines from Moderna and Oxford University also reported high efficacy in their own trials, not to mention the FDA granting emergency authorization to Eli Lilly’s antibody treatment. In effect, the vaccine news was itself an inoculation for the market, protecting its health and boosting its resistance against bad news and the pandemic.

This inoculation truly came just in time as the pandemic situation was making a dramatic turn worse. The US rapidly hit new milestones as total infections spiked from around 9 million at the start of November to over 16 million now in December and many more likely before the end of the year. Public health restrictions have returned in many states, locking down economies yet again. This slowdown is predicted to drag GDP back into the negative through the 1st quarter of 2021. Despite the economic fallout and even as Congress has yet to produce an economic stimulus bill, Treasury Secretary Mnuchin has ended lending for some of the Fed’s economic support programs, dampening the economic outlook even further.

These developments would ordinarily have caused a major downturn for markets, but the dose of optimism from the vaccine news has proven highly effective against the volatility, providing a solid underpinning of support. Third quarter corporate earnings were also better than expected, offering hope that the economy remains strong enough to weather the challenges until the pandemic comes under control. On the wave of these vaccine hopes, the markets have been able to hold on to their dramatic gains since the election.

Resurgent Pandemic and Congressional Inaction Will Test Market Sentiment

By mid-December, the rally has seen all major stock market indices make new all time highs. The pace now seems to have slowed and we may see a consolidation before the next move. The market’s high levels have already captured a lot of the potential upside as expectations are high that the vaccine rollout will begin turning the tide against the pandemic. The market’s next move from here depends on how well the economy can hold on amid the surging pandemic before the new vaccines can bring it under control.

With vaccines rolling out now to priority recipients, investors fully believe the end of the pandemic is in sight, and once that hurdle is passed that the economic rebound will be swift. The market will therefore not be so concerned with the state of the economy in the short term — barring a catastrophic collapse — and there is a high likelihood the rally will soon resume and continue into the new year.

That said, a slew of potential market spoilers lurk in plain sight, meaning investors have an incentive to step cautiously. The widening pandemic is doing very real and increasing damage to the economy right now as more states grapple with lockdowns and job numbers continue to deteriorate. The danger for investors is there is little indication how much more punishment the economy can bear before the damage becomes lasting and we reach the tipping point to a longer economic recession. Even more alarming, Treasury Secretary Mnuchin’s decision to end the Fed’s support programs and Congress’ continuing failure to pass a stimulus bill only accelerate the economy sinking towards that unseen threshold. If economic indicators keep worsening through the holiday season and into 2021, investors may begin to take this danger more seriously, arresting the market rally and potentially seeing a selloff as sentiment becomes more cautious.

Looking at the chart, the S&P 500 hangs just shy of its all time high around 3712, which is not likely to be a significant barrier if momentum continues higher. As the market consolidates in the meantime, it will likely stay above 3600 as the lower end of its current trading range. Should bad news push the market down or investor sentiment sour, the market will find support at 3500 where it rose after the election before the recent developments. Significant economic deterioration would have to happen to see markets fall below this, and we would see some support at 3225 where the index has rebounded from twice, and further support at the psychologically important level of 3000.

Lockbox Fund Performance and Strategy

We resumed our trading approximately a month ago in November, gradually rebuilding our positions in the market to generally successful results. The last day of trading last month, however, saw a loss which put us slightly into the negative. These kinds of swings and losses are a natural consequence of market investing and our performance has already swung back up in December, recouping this loss and making further gains.

As we ramp up our trading, we are now also taking a broader perspective of our portfolio diversification to better serve our long term goals of a strong and sustainable investment. During our trading pause, we examined how market risks and opportunities have evolved over the last ten years of our trading, and identified notable opportunities outside of our main option strategy. Moving forward, we intend to dramatically broaden our investment portfolio to both diversify it as well as to capture these strong opportunities.

Our core options trading strategy remains a strong tool, but it is clear over the past year it is not enough to be the sole strategy of our fund. We have been too focused on only this core competency, and overlooked outside opportunities to diversify and strengthen our portfolio. With the changes outlined above, we are returning with a wider investment perspective and a redoubled commitment to provide a durable and resilient long term investment in Lockbox Capital.

November Lockbox Monthly Return After Fees*: Please Contact Us
2020 Lockbox YTD Return After Fees*: Please Contact Us
November S&P 500 Monthly Return: 10.75%
2020 S&P 500 YTD Return: 12.10%

*Incentive fee is calculated at twenty percent based on the difference of the high watermark and ending account balance for the Incentive Allocation period