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 | March 2020

The OnCourse FORMula       AXS Multi-Strategy Alternatives Fund          Our Team        Contact Us           
Good morning -

We write our monthly (March) newsletter a few days early to give some big picture perspective to what's happening this week.  The stock market entered "correction" territory this morning, meaning it is down 10% off of its most recent high.  The cause: the coronavirus and media hysteria.  

If you've followed us for long you know that we ignore the daily news for the most part because, in our opinion, it is generally nothing more than "noise" driven by political agendas and the media's desperate need for drama to generate ratings in this 24/7 news cycle era.

Don't get us wrong, a 10% drawdown is real.  However, as we've seen over the last few years, strong market fundamentals can quickly turn things around on a dime!  So where are we?

Brian Westbury and our friends at First Trust have released their 2020 economic outlook. Westbury was one of the few who got 2019 right and has been consistently spot on about the economy and the stock market for some time.

First some facts:
  • We are in the 128th month of this economic expansion, the longest recovery in US history;
  • Unemployment at 3.5% is the lowest in 50 years;
  • U6 discouraged workers at 6.7% is the lowest on record back to 1994;
  • Stocks were up 30% last year and made new all-time highs in both January and February despite "trade wars."
Per First Trust, a tsunami of technology drives the market: tablets, smart phones, apps, the cloud, 3D printing, fracking, genome mapping, upcoming 5G, etc. All this technology raises productivity and supports profit margins. Westbury projects corporate profit growth of 10-12% in 2020.

The Federal Reserve holds the keys to the economy.   As long as monetary policy is not "tight" but instead remains accommodative, Westbury says the chances of recession are small. In defining tight vs loose monetary policy, Westbury compares the Fed Funds rate (currently 1.5%) with the two-year annualized percent change in nominal GDP (real GDP plus inflation, currently 4.5%).   Historically, recessions occur when the Fed Funds rate exceeds annualized nominal GDP growth. Here, the Fed is well below GDP, and thus monetary policy is loose or accommodative.

Westbury projects:
  • Real GDP to grow 2.5% this year
  • Inflation to hit 2.5% this year
  • The S&P to reach 3,650 before year end
The market had been so strong that it took a coronavirus epidemic, a Senate impeachment trial, and an inversion of the yield curve to cause the first 2%+ pullback since early October. 

This week, fears over the Coronavirus gripped investors as the pace of growth outside China picked up, particularly in Italy, South Korea and Iran. Even so, there are less than 600 new cases a day outside China. Economically, this is a molecule in a bucket. The concern, as expressed by the CDC in a news conference on Tuesday, is that this number will pick up and make its way to America.

At that point, fighting the virus transforms from a battle preventing "them" from infecting "us" to preventing us from infecting each other. This will require quarantines and other distancing measures, such as staying home from a ball game or a movie theater for a while.

All of this is potentially disruptive to the economy. However, the death rate is very low for most working age people. Further, the market recovered from sell offs due to the SARS virus in 2003 and the Zika virus in 2015-16 to make new all-time highs.

Unless consumers drastically reduce spending habits for an extended period, we expect the same to happen here.   Through Thursday, the market has moved lower six straight days and is vastly oversold.  We are expecting a relief rally to start soon. 

Do you have a 401k at your place of work? At Kerns Capital, we offer a "Manage it for Me" service where we analyze your plan choices, recommend an allocation based on your personal goals and risk tolerance, make the trades for you and monitor your portfolio for any changes that need to be made in the future. If you are interested in "Manage it for Me," please contact Marty Kerns at 713-993-0949.

The math of large loses tells us that it gets harder and harder to make up loses as they increase.  For example, it takes an 11% return to make up a 10% loss.  However, it takes a 100% return to make up a 50% loss; and a 133% gain to make up the 57% loss such as during the 2007-2009 "Financial Crisis" that preceeding the Great Recession. And as we've seen, this can be very difficult without extreme government intervention.  Accordingly, we try to limit loses. 

When the market has been very strong like it has our signals can be slow to react relative to the speed of the market's move.  This is by design because we don't want to be "head-faked" out of the market just as it's ready to turn around. That said, we're watching closely.  

"Games are won by players who focus on the playing field - not by those whose eyes are glued to the scoreboard." - Warren Buffett

To your financial future, 

Marty Kerns
President & Chief Executive Officer
Parker Binion
Chief Investment Officer
About Kerns Capital Management

family wealth advis or , Kerns Capital Management works with business professionals who among other things aspire to financial independence.  We have developed a proprietary process called The OnCourse FORMula   to address the critical financial events that occur as a client's life unfolds and their needs evolve.  Ours is an integrated approach that includes wealth management, risk management, tax planning, estate planning, cash management and philanthropy.

At KCM, you won't find investment managers who create static portfolios, park their clients' money and move on, checking back only to collect their fees.  Instead, you will find innovators.   We believe portfolios can be managed to grow capital while effectively managing volatility and risk. In addition to traditional diversification techniques, a key component of our risk management process is the firm's Bear Market Hedge strategy that strives to protect client portfolios from catastrophic life changing losses during periods of extreme market risk.   

As an investment manager, we seek to exploit market inefficiencies in equities, credit and volatility, both long and short.  We apply the same attention to risk in the deployment of capital that has guided us since our inception as a fiduciary investment manager to corporate pensions, trusts and high net worth individuals. KCM was founded in 1996, and is based in Houston, Texas.

For more information, please visit or contact Martin Kerns or Parker Binion at 1 (800) 945-2125 or

Performance data represents past performance and is not a guarantee of future results.  

The S&P TR 500 Index is an unmanaged composite of 500 common stocks. This index is widely used by professional investors as a performance benchmark. Total return includes reinvestment of dividends. You cannot invest directly in an index. The Dow Jones Industrial Average is a price-weighted average of 30 of the largest and most widely held stocks traded on the New York Stock Exchange and the Nasdaq. The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depository receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.

The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market. Wikipedia