Navigating Market Volatility 
Meeder’s tactical strategies are constructed with real-world investor behavior in mind. Our objective is to provide investors with a smoother ride, as well as minimize the impact of having to play the mathematical catch-up game. For example, a 50% loss of value requires a 100% return to get back to even! We do this by reducing exposure to equities during periods of high market risk and increasing exposure to equities during periods of low market risk. One of the primary purposes of this approach is to keep investors committed to their investment strategy throughout a full market cycle and to help reduce emotion from the decision-making process that can be so devastating to investors. The 4th quarter of 2018 was an excellent example of one of these times.
AN EXTREMELY UNUSUAL 5 MONTHS…especially the last 2!
In early October, the Federal Reserve became concerned that the economy was starting to show signs of overheating and took a more hawkish tone. On October 3, Fed Chair Jerome Powell announced that interest rates were “a long way from neutral” in what many believe was an attempt to caution investors who were looking for the Fed to halt their policy of raising interest rates. This statement sent shockwaves through the markets and the S&P 500 fell over 5% in just two days.
Throughout the 4th quarter, continued negotiations with China and uncertainty around tariffs kept investors on edge. Small-cap equities represented by the Russell 2000 Index continued to struggle, ultimately declining 29% from its all-time high made in early October. In addition, crude oil prices declined 40% from a multi-year high of $76 a barrel to as low as $46 in the final quarter of 2018.
Despite angst from investors on December 19th, the Fed carried out its widely anticipated move by hiking rates 0.25%, believing that the economy was strong enough to absorb additional interest rate increases. This was the fourth occurrence in 2018 and the ninth time since rates were zero in December of 2015. These factors contributed to the S&P’s worst percentage drawdown of -19.7% since the Financial Crisis of 2008.

AFTERMATH OF MAJOR STOCK MARKET DECLINES
The stock market usually takes several months to recover after significant declines and typically trends sideways to slightly higher over a multi-month period. In many cases, the market even goes back down and retests its previous low. We call this a consolidation or base building process. More importantly, rarely has the stock market immediately started a significant advance after a large decline (commonly referred to as a “V-bottom”). During these consolidations, our models have historically increased exposure to the stock market as markets have gradually improved. The two charts below illustrate drawdowns that occurred during 2011 as well as 2015-2016. These are recent examples of the stock market building a base, or consolidating, before establishing a sustainable advance.


What is even more unusual is the magnitude of the stock market advance from the December 24th low as compared to all other 2-month advances from initial -19% declines from all-time highs. Our research shows that since 1970, there have only been 8 times that the market declined by more than -19% after reaching an all-time high. In some instances, the market ultimately traded lower, while others rebounded. The average 2-month return after the initial -19% drawdown was 5.4%. In this current “V-bottom” recovery, the S&P 500 has gained 18.4% in two months, which is over three times the average return during similar historical periods. As of February 26, the S&P has finished in positive territory 27 out of the first 37 trading days of 2019. Historically, going back to 1950, there has never been this many positive days during the first 37 trading days.
HISTORICAL DRAWDOWNS OF -19%

MEEDER’S DECISION MAKING PROCESS
Meeder adjusts the equity exposure of many of its tactical funds and portfolios using its Investment Positioning System (IPS). Just as a navigation system or GPS provides directions on the best route to take, the Meeder IPS is designed to help investors get to their destination with a smoother ride (less risk). We believe that if an investment process is fact-based and data driven, investors are less likely to get sidetracked by all the emotions that can potentially keep them from reaching their investment goals. Our models utilize economic and market driven data to make investment decisions based on fact and not emotion.

We began the 4th quarter of 2018 with 100% equity exposure in the stock market. As the quarter progressed, Meeder’s internal measure of market risk reached its highest levels since 2011. As market risk within our model increased, we reduced our equity exposure throughout the quarter as illustrated by the chart above.
The reduction in our allocation to equities resulted in a maximum drawdown of -10.9% for the Meeder Muirfield Fund during the 4th quarter, which fully utilizes the Meeder IPS and is incorporated in many of our investment portfolios, compared to -19.7% for the S&P 500 Index. As stated earlier, one of our primary objectives is to minimize playing the mathematical catch-up game…for every percentage point loss, it takes more of a percentage gain to recover the loss, as shown on the chart below. The S&P 500 needs to gain 25% just to recover all its -19.7% loss. Conversely, the Muirfield Fund only needs to gain 12% to recover from its -10.9% loss. See the chart below.

While our clients were protected from much of the downside in the 4th quarter, and thus not having to play as much of the mathematical catch-up game, they did not fully participate in this unique “V-bottom” rally. This comes as no surprise to us. The Muirfield Fund focuses on making tactical adjustments to protect the downside and reduce volatility in times of heightened market risk. Reducing volatility, in our opinion, is so important because many academic studies have found that investors often make emotional decisions during major market declines that have led to selling equities at the wrong time. We seek to minimize volatility so that our clients do not make emotional decisions which could prevent them from achieving their long-term goals.
WHAT IS OUR LONG-TERM MODEL SIGNALING?
So far in 2019, our long-term model has shown improvement as long-term trends have turned more favorable. Valuation factors have also shown some near-term improvement and are in line with their historical average. The main driver of the model’s negative output has been due to macroeconomic factors. This model also looks at many of the same factors the Fed follows. These factors show that unemployment levels remain at historic lows and inflation pressures remain moderate, meaning that the potential for additional rate increases still exist. While the Fed has reduced its expected number of rate hikes from 3-to-2 in 2019, interest rate increases have historically contributed negatively to equity performance. The long-term model has shown improvement since the end of 2018 but remains negative overall.
WHAT IS OUR INTERMEDIATE-TERM MODEL SIGNALING?
Our intermediate-term model consists of factors that look at investor sentiment as well as institutional demand for stocks. We view sentiment as a contrarian factor. Simply put, if market sentiment moves to an extreme in one direction, our model will likely signal for us to move in the opposite. As Warren Buffett has famously stated, “As an investor, it is wise to be fearful when others are greedy and greedy when others are fearful.” As markets have continued to rise this year, sentiment has become modestly bullish, leading this portion of the model to be slightly negative. The other portion of this model is represented by factors that track institutional demand for stocks. So far this year, there has been an increase in the institutional demand for stocks which is a positive in the model. The overall output of the intermediate-term model is now neutral.
WHAT IS OUR SHORT-TERM MODEL SIGNALING?
At the end of 2018, our short-term model was negative. Since then, short-term trend factors and market breadth have been improving as the stock market continues to exhibit robust performance. These factors have turned the overall short-term model output positive.

WHAT IS HAPPENING WITH VOLATILITY?
Our internal measure of market risk reached levels near the end of last year that we had not seen since 2011. As this year has progressed, market volatility remains elevated but is starting to decline.
CURRENT MARKET POSITIONING
Based upon our long-term model slightly improving, our intermediate-term model being neutral, our short-term model turning positive and volatility declining, this has led us to increase our exposure to the stock market to 65% as of February 28th in the Muirfield Fund.
MUIRFIELD FUND: A LONG HISTORY OF SUCCESS
The Meeder Muirfield Fund has been tactically managing money for over 30 years and is utilized extensively in many of our investment portfolios. Bob Meeder has the longest fund manager tenure in Morningstar’s Tactical Allocation category, having been with the Fund since its inception in 1988. Meeder Muirfield Fund was recently recognized by U.S. News as #1 in the Tactical Allocation Category among 298 funds.
As of February 28, 2019, Morningstar rates the Muirfield Fund (FLMIX) with its highest 5-star rating over the overall, 3, and 5 year periods out of 284 funds, 238 funds, and 179 funds respectively. Also as of February 28, 2019, Morningstar rates the Muirfield Fund (FLMIX) with a 4-star rating over the 10 year period out of 63 funds.