Week 10 Sitrep

Special note added 3/3/20:

Market volatility continues into the week of March 2nd – after a 5% up day on Monday, the major indexes are down more than 2% on Tuesday. This is a very strange occurrence to see since the Federal Reserve announced an emergency rate cut of 50 basis points this morning to a target rate of 1-1.25%. U.S. interest rates are falling across the board as the 10-year Treasury Bond has touched a new low just below 1%.

Fed Chairman Jay Powell stated that the Fed wanted to be ahead of any economic impact that the coronavirus may have on economic growth. World central bank leaders are expected to follow suit in the coming weeks. Historically, stocks have a very favorable reaction to Fed stimulus like today, so a heavy selloff is rather unusual. Market volatility, on the other hand, is not and we will watch for new opportunities as they present themselves.

Source: Smith Capital Investors, 3/3/20

 

Weeks like last week make personal investing very challenging. In the midst of a healthy U.S. economy and rebounding corporate earnings growth, the S&P 500 went from new all-time highs on February 19th to experience the fastest correction (down 10%+) ever recorded. Between February 20th and 28th the index experienced a decline of nearly 15%.What started as a good year for the markets has quickly turned as the S&P 500 is now down more than 8% for the year.1 The Dow Jones Industrial Index and the NASDAQ suffered similar fates down more than 10% as well. While the MSCI EAFE (non-U.S.) Index was already lagging for the year, international stocks participated in the downside equally over the week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/2/20

 

It is fair to say that all areas of the market were subject to heavy selling last week. The range of returns was very tight for most sectors showing returns between -9% and -15%. Things only got worse for the energy sector as the price of WTI Crude has fallen more than 25% in 2020 and major energy stocks were hit hard last week. The energy sector is now down 24% in 2020.2 Large and small companies were equally affected last week posting returns down 10+% in all categories. Large growth companies continue to show better returns for the year given their strong returns in January and early February.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/2/20

 

The scope of this correction is hard to picture unless we consider the trajectory of the market over the last two years. The most recent comparison for a sharp decline would be December 2018. While the February 2020 decline does not quite match the depth of that decline, it is quite evident that this decline has been much faster and sharper. Another feature of this recent move is the breadth of this decline where the markets experienced two days where 90% of the volume traded was down for the day (Monday and Thursday). Thursday’s trading also resulted in the largest point drop ever for the Dow Jones Industrial Average at -1,190 points.3

Source: Saut Strategy, Charts of the Week, Andrew Adams, 3/2/20

Source: CNBC.com, Fred Imbert, “The Dow lost 12% in one week…”, 2/28/20

 

We often remind investors that markets will always go up as well as down. Traditional market behavior shows that market declines of 10% or more happen at least once per year. According to CNBC.com, the market has experienced corrections 26 times since 1946 with the average correction bringing the index down 13.7%. The index usually experiences the decline over a four month period and often takes four months to recover.4 Clearly, this correction happened in a much shorter time period.

Source: CNBC.com, Fred Imbert, “The Dow lost 12% in one week…”, 2/28/20

The news media wanted us to focus our attention on the Coronavirus (COVID-19) outbreak last week as it captured the majority of the headlines all week. While we are saddened by the news of new cases and the tragedy it has caused for many families, many analysts are struggling to connect the threat of the virus to the current market decline. Dr. Lawrence Kagan of Westside Pediatrics in Florida shared a few of the known statistics:

  • Approximately 20% of the common colds we experience seasonally are coronaviruses
  • COVID-19 is similar to recent variations of coronavirus, such as SARS and MERS
  • Mortality rates are mixed depending on demographics:
    • Average overall mortality is 2.3%
    • Among those with a history of high blood pressure, diabetes, heart disease, chronic lung disease or cancer, mortality is 5-10%
    • Those with no history of chronic disease is less than 1%
    • Overall men – 2.8%
    • Overall women – 1.7%
    • Over age 80, the mortality rate is over 15%
    • Ages 10-19 years, mortality is 0.0018%
    • Ages 0-9 years of age, mortality is statistically irrelevant (~0%)

Dr. Kagan reminded his readers that common hygiene practices will go a long way in helping to prevent seasonal issues but that anyone experiencing respiratory symptoms should seek help immediately. Other data confirms that the current seasonal flu has a much higher mortality rate in the United States. As has been reported, there is reason to believe that current statistics are not completely reliable and we may not know the full extent of those actually infected with COVID-19 versus a traditional respiratory illness.5

Source: Bespoke Investment Group, The Bespoke Report, 2/28/20

 

Our market snapshot shows surprising strength in the long-term indicators despite the market turmoil last week. The short-term indicator remained negative as expected. Our interpretation of the indicators shows that the greatest concerns in the market have not stalled the long-term bull market at this time. We continue to monitor the indicators as they reflect changes in technical trends of how investors react to the markets.

Interest rates continue to fall as the 10-year U.S. Treasury bond recorded an all-time low yield of 1.13%. Interest rates typically fall in periods of higher demand for the bonds – recall that the yield of a bond acts inversely to its price. As investors seek safety from other areas of the market, the increased demand raises the price of current bonds driving their yields lower. According to Smith Capital Investors, an investment in the 30-year U.S. Treasury Bond at the beginning of this year would have risen 16.97% at the end of February.6 That is hard to imagine!

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/2/20

 

These are volatile times as many states head to the polls for Super Tuesday this week. Our investment committee continues to believe that much of the recent market action is a result of the success of Bernie Sanders in the democratic primary elections. Investors in stocks have a genuine concern for any candidate who espouses socialist economic policies, especially foreign investors who are accustomed to socialist economies. The political picture is very difficult to predict so we will monitor where risk may affect our portfolio and adjust accordingly.

 

We are watching the economic impact of the political primaries, as well as the coronavirus, very carefully. The 4th quarter earnings results were encouraging as U.S. companies showed an increase in earnings growth despite analysts warning the opposite. It is not uncommon for actual earnings to be higher than analyst estimates. Clearly the negative headlines are affecting stock analysts this year as earnings expectations continue to be reduced ahead of 1st quarter earnings announcements. According to John Butters at Factset, analysts are expecting a decline of 3.3% in earnings growth compared to a normal decline of 2.6% over the past five years.7 Many things can change in the next 45 days before earnings are reported so we are not banking on a significant decline in corporate earnings yet.

Source: Factset Insight, John Butters, “Are analysts slashing S&P 500 EPS estimates?” 2/28/20

 

One last comment for our current clients receiving the weekly sitrep. While we have been speaking to many of you over this past week, please know that our risk management strategy has performed very well in the 2020 market scenario. Most of our client portfolio’s experienced very moderate declines this year so far reflecting the conservative stance we had taken when the year began. We recently addressed the heightened risk in lower credit bonds by replacing two of our core bond components. We continue to invest in high quality, U.S.-based stocks and bonds seeking to achieve an attractive risk/return profile. While we are not at liberty to post our average portfolio return numbers in this newsletter, please feel free to give us a call for specific returns in your portfolio.

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. J.P. Morgan Asset Management, Weekly Market Recap, 3/2/20
2. Bespoke Investment Group, The Bespoke Report, 2/28/20
3. Saut Strategy, Charts of the Week, Andrew Adams, 3/2/20
4. CNBC.com, Fred Imbert, “The Dow lost 12% in one week…”, 2/28/20
5. Bespoke Investment Group, The Bespoke Report, 2/28/20
6. Smith Capital Investors, 3/2/20
7. Factset Insight, John Butters, “Are analysts slashing S&P 500 EPS estimates?”, 2/28/20

Login