The perfect asset class for stock investors raising cash on rallies

By April 9, 2020Uncategorized
In this week’s edition, I’m going to help lay out a salient strategy for addressing what is on every client’s mind – should I sell into the next rally?

This past Monday saw the major stock market averages spike over 7% higher in reaction to new data showing a slowing a new cases and death rate for the Coronavirus. The market was already retesting the March 23 lows with many Wall Street bears talking their book (short-sellers ) and calling for lower lows. Fear had totally gripped investor sentiment at CBOE Volatility Index (VIX) shot up to 85.47 and a level not witnessed since March 2008.

A reading of 85.47 indicates sheer panic on the part of investors , usually accompanied with sleepless nights, wondering if all the market gains from the past ten years are going to vanish in the span of ten weeks. RIA’s are trying to administer intense client hand-holding in the midst of social distancing due to a black swan pandemic – and in many cases, it’s not working. Clients want more cash and less equity exposure. The sudden impact to one’s net worth is just too much for some.

Instead of hoping that everything normalizes where happy days are here again, RIA’s might consider what options are available and can be utilized by their clients when they decide to trade during a relief rally to raise cash and book short and long-term capital gains before the second-quarter earnings season commences in mid-July. In my opinion, s ales and earnings figures are likely to result in huge downward revisions by the analyst community and forward guidance could prick the balloon of a confident recovery narrative.

I’m no career stock market technician, but sometimes a picture is worth a thousand words. It’s my take that the chart below of the S&P 500 SPDR ETF (SPY), that mirrors the S&P 500 index, has a good shot at rebounding to $300, the equivalent of 3,000 for the S&P 500, on a wave of bullish COVID-19 headlines in the next few weeks.

Take it for what its worth, but that thick black line represents the 200-day moving average. Not only is the slope of this all-important trend line can be a beginning for a move downward, but what was major technical support for the market can now become a major overhead resistance.

Every fund manager in the world that respects technical analysis may be readying their fund to take some equity risk off if the market does in fact rally another 15% to this key level, and fails to take it out after a few attempts. This certainly doesn’t imply to sell everything, but for some clients, it might look at this and decide that it might be a good jumping-off point to de-risk, assuming the market even gets there over the near term.

Assuming the mother of all snapback rallies does unfold in the next few weeks as the COVID-19 numbers improve, why not take a hard look at what options you can discuss with your clients, about considering to diversify a portion of portfolio capital from the volatility of the stock market into what may be less volatile option of newly constructed and government-designated areas of Opportunity Zones multi-family residential rental properties. Everyone doesn’t need a new car, but everyone needs a place to live, and REITS that invest in Opportunity Zones may offer a de-risking strategy for clients seeking alternatives and capital gains deferment, reduction or elimination.

Consider the investment proposition having clients invest in Qualified Opportunity Zone Funds (QOF) like the one I work for – Belpointe REIT.

  1. Clients have 180 days from the sale assets (stocks, bonds, property, a business, collectibles, precious metals, etc.) to roll any capital gains into a QOF.
  2. Defer those re-invested capital gains in a QOF until December 31, 2026, or upon the sale of their interest in the QOF, whichever comes first.
  3. Investors receive a 10% step-up in basis of any capital gains invested in QOF s. If the QOF is held for 5 years prior to December 31, 2026.
  4. No capital gains taxes are paid on the appreciation of the investment if the shareholder holds the investment for at least 10 years.

The Belpointe REIT structure is very unique in that we set the template for what clients truly desire in times like the present – liquidity. Shares of Belpointe REIT (BELP) are publicly listed as of November 27, 2019 and are the only traded Opportunity Zone structure available today. The shares were priced at $100 and trade today at around $100. Price stability and liquidity are like a breath of fresh air in the current market landscape.

Better yet, aside from the compelling tax benefits afforded to investors, Belpointe REIT is structured as an income and growth vehicle. Our structure projects low single-digit annual income yield in years 1-5 and higher single-digit annual income yield in years 6-10. Capital gains are forecast to generate between 15%-20% annually – in addition to the income stream.

Belpointe REIT being the only publicly traded QOF structure, would be held like any asset within a RIA’s assets under management (AUM), whereby normal management fees are applied. So, if and when RIAs and clients agree to reduce stock market exposure, divest a business, cash in some collectibles or sell some properties, and raise cash, there is a highly attractive avenue by which to direct the capital gains that brings with it what I believe are unrivaled features and benefits.