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During the Current Recession, It May Pay to Go Defensive

June 23, 2020

It’s official. The US entered a recession in February 2020, according to the National Bureau of Economic Research, the group that is the official arbiter of US expansions and downturns.

Why should investors consider making an allocation to a defensive equity product? Why should investors consider the Armor US Equity Index ETF (ARMR)?

Equity Market Downturns Have Historically Accompanied Recessions
In every recession since the Great Depression, the equity market has declined. Since the end of World War II, the S&P 500 declined, on average, nearly 31% during a recession. The last two recessions saw S&P 500 declines of over 50%.

Since the US is officially in a recession, it may be time for investors to start positioning their portfolios for an equity market decline.


Retest the Low
The S&P 500 declined by -33.92% in the period between 2/19/20 and 3/23/20. The index then advanced 44.47% by 6/8/20, just 153 points shy of its 2/19/20 high.

Does that mean that we are out of the woods?


Source: TradingView, Daily Prices 12/31/19 – 06/15/20

Past performance does not guarantee future results. The referenced index is shown for informational purposes only and is not meant to represent the fund. Investors cannot directly invest in an index.

A recent MarketWatch article noted that in the 25 bear markets since 1928, the equity market has retested its low 60% of the time. Stated simply, in 60% of bear markets, the equity market declined into bear market territory, rebounded sharply, and then went on to decline to its previous low or lower. A retest of the recent low in this current environment would call for a drop of -27.93% as measured from the closing price on 06/12/20 to the recent low of 03/23/20.

The four most dangerous words in investing are often said to be, "It’s different this time."

Assessing the Damage
The US unemployment rate reached 14.7% during April 2020, its highest total since the 25% rate reached during the Great Depression. For comparison, the unemployment rate peaked at 10% during the Financial Crisis in 2009, according to the US Bureau of Labor Statistics.

Gross Domestic Product (GDP) declined by an estimated 5% during the first quarter of 2020, according to the US Bureau of Economic Analysis (BEA). Currently, the Atlanta Fed is projecting a nearly 53% decline in second quarter 2020 GDP.

V, U, or Swoosh?
What will be the shape of the recovery from the current recession? Will it be swift or protracted?

We cannot say for sure. All we know is that a large amount of damage has been done to the economy.

Why You Should Consider a Defensive Allocation
You may want to consider a defensive allocation in your portfolio for the following reasons:

  • The US is officially in a recession and equity market downturns have historically accompanied recessions.
  • Historically, the equity market has often retested its low after an initial rebound, will we see that again this time? A decline to the March 23rd low would be a drop of -27.93% from the June 12th closing price on the S&P 500.
  • A significant amount of damage has been done to the US economy as evidenced through the current unemployment rate and preliminary GDP figures.

Why Should Investors Consider the Armor US Equity Index ETF (ARMR)?

The Armor US Equity Index ETF (ARMR) Utilizes a Sector Rotation Strategy
The Armor US Equity Index ETF (ARMR) seeks to provide investment returns that, before fees and expenses, correspond generally to the total return performance of the Armor US Equity Index. The index is designed to provide exposure to the sectors of the US equity market that the fund’s index provider believes are most likely to generate positive returns while managing downside risk.

ARMR may provide investors with an attractive defensive equity portfolio during the current recession.

[1] NBER Determination of the February 2020 Peak in Economic Activity, National Bureau of Economic Research, 6/8/2020
[2] DeCambre, Mark, Will the Stock Market Tumble Back to Its Coronavirus Lows in March? About 92 Years of S&P 500 History Says There’s a Good Chance, MarketWatch, 5/1/20
[3] Iacurci, Greg, Unemployment is nearing Great Depression levels. Here’s how the eras are similar — and different, CNBC, 5/19/20
[4] Labor Force Statistics from the Current Population Survey, US Bureau of Labor Statistics, Retrieved 6/14/20
[5] Gross Domestic Product, US Bureau of Economic Analysis, Retrieved 6/14/20
[6] Cox, Jeff, GDP Is Now Projected to Fall Nearly 53% in the Second Quarter, According to a Fed gauge, CNBC, 6/2/20

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s prospectus and Summary Prospectus, which may be obtained by visiting https://armoretfs.com/documents. Read the prospectus and Summary Prospectus carefully before investing.

Foreside Fund Services, LLC, distributor.

Investing involves risk, including possible loss of principal. The Fund’s return may not match or achieve a high degree of correlation with the return of the Index. To the extent the Fund’s investments are concentrated in or have significant exposure to a particular issuer, industry or group of industries, or asset class, the Fund may be more vulnerable to adverse events affecting such issuer, industry or group of industries, or asset class than if the Fund’s investments were more broadly diversified. Issuer-specific events, including changes in the financial condition of an issuer, can have a negative impact on the value of the Fund.

A new or smaller fund is subject to the risk that its performance may not represent how the fund is expected to or may perform in the long term. In addition, new funds have limited operating histories for investors to evaluate and new and smaller funds may not attract sufficient assets to achieve investment and trading efficiencies.

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