Week 11 Sitrep

Clearly the two most common questions we have received over the last week have been “is it over yet?” and “is there anything we should be buying right now?”. We are encouraged by the fortitude of our clients and friends as most analysts we read believe this to be a temporary stock market correction rather than the end of the long-term bull market or a looming economic recession. U.S. stocks showed a modest recovery for the week, but it sure didn’t feel that way. The daily volatility remained very high on both up and down days. The S&P 500 finished the week higher by 0.65% while the smaller company index (Russell 2000) finished lower by 1.81%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/9/20

 

The defensive sectors performed the best last week as utilities, consumer staples and health care were all up more than 5%. The energy sector continued its laggard ways while financial stocks also took a hit down roughly 4% for the week. There is still a large margin of difference in returns for large growth companies this year, albeit in a negative return environment.

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

 

There are two elements to the recent stock market correction that make it unique:

  • The short window of time it has taken to experience the downturn
  • The depth of the market downturn (including the Monday, March 9th decline)

Analysts have noted that this correction has been the fastest on record to go from all-time highs to a loss of 10%.1 Andrew Adams of Saut Strategy noted yesterday that the S&P 500 Index has now fallen to a support level reached in March 2009 and December 2018.

Source: Saut Strategy, Charts of the Week, Andrew Adams, 3/10/20

 

Despite the fear being promulgated by the media, this market correction remains within the bounds of a “normal” correction historically. According to Bespoke Investment Group, we have seen seven corrections of at least 10% since the financial crisis in 2009. The average stock market correction lasts just over two months and has seen a decline of nearly 15%. This correction measures 16 days and was down 13.43% as of Friday.2

Source: Bespoke Investment Group, The Bespoke Report, 3/6/20

 

One of the many challenges we faced at the end of 2019 was the impact of rising stock prices on stock valuations. In February, we wrote about four different stock sectors that had P/E ratios above the 98th percentile based on the prior ten years.3 Sometimes it is easier to see the impact of a correction by looking at the reduction in valuations by sector. Clearly, the correction has had more of an impact on financials (at their lowest valuation in the last ten years), industrials and energy companies. Technology and communication services have been very successful sectors for investors in the last few years, yet have not see their valuations drop as dramatically during this correction.

Source: Bespoke Investment Group, The Bespoke Report, 3/6/20

 

Our investment committee is carefully watching the health of the U.S. economy during this correction and our view is that an economic recession remains a low probability. Brian Wesbury, Chief Economist at First Trust reports there are many evidences that the economy remains strong including:

  • Unemployment remains at 40-year lows running 3.5%
  • Payrolls continue to grow, adding 250,000+ jobs each in January and February
  • Retail sales up 4.4% year-over-year
  • Housing starts are growing at the fastest pace since 2006
  • The manufacturing index survey remains in growth territory compared to 2019
  • The Atlanta Fed is modeling real GDP growth for 1st quarter at 3.1%

While the effects of the virus will undoubtedly reduce 1st and 2nd quarter GDP estimates, Wesbury does not see that leading to negative GDP over mutliple quarters. Rather, he is anticipating a rather strong recovery in economic growth as we get past the seasonality of the virus.4

Source: Bespoke Investment Group, Wondering What Could Have Been, 3/9/20

 

Our market snapshot saw the short-term indicator return to “positive” last week with a few strong positive reversals in the market. While all three indicators are positive, we remain cautious with any client bringing new money into the markets. We continue to note that despite the severity of the correction, the long-term indicator is only down roughly 10% from its highest values in February. Our belief is that this correction has not changed the long-term bullish demand from investors.

 

U.S. interest rates remain at very low levels due to increased demand from investors. While the Federal Reserve delivered a surprise rate cut last week, market interest rates were already trading significantly lower. The 10-year U.S. Treasury has sunk as low as 0.31% over the weekend on news that OPEC members could not agree on production cuts. The rate bounced back to 0.61% by the close of business on Monday, March 9th, as President Trump pitches a fiscal stimulus package for the economy.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/9/20

 

We continue to believe that the correction started as a result of the “Sanders Effect”, a term that analysts have used to describe the possibility that Bernie Sanders could have been the democratic candidate for President. The stock market was concerned because his “democratic socialist” policies were not seen as being good for stocks. However, since the selloff began, the market has added concerns about the COVID-19 virus and the regional spat between Russia and Saudi Arabia over oil production. The net impact has been very negative for oil prices and energy stocks.

Source: Bespoke Investment Group, The Bespoke Report, 3/6/20

 

We continue to see remarkable volatility in the stock and bond markets daily, making these weekly letters dangerous because so much can happen in between writings. Our investment committee follows a disciplined risk management approach to investments that strives to protect portfolio’s in market downturns. As a result, most of our client accounts are down considerably less than the markets after delivering handsome risk-adjusted returns in 2019. Please reach out to us if you would like to discuss specific numbers or scenarios.

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. Saut Strategy, Charts of the Week, Andrew Adams, 3/10/20
2. Bespoke Investment Group, The Bespoke Report, 3/6/20
3. Bespoke Investment Group, The Bespoke Report, 3/6/20
4. First Trust Monday Morning Outlook, Brian Wesbury, 3/9/20

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