Week 13 Sitrep

ICYMI note: As follow up to the note from last week, the IRS has now released guidance that both the tax filing date as well as the due date for Q1 estimated tax payments has been moved to July 15th. Obviously, for those expecting to receive a refund it is to your best interest to file your taxes as soon as possible. If you need assistance with your 2019 return or have further tax questions please feel free to contact Katie Lomness, our CPA partner, directly: info@lomnesscpa.com.

 

We are finally beginning to see some patterns emerge in the market that are helpful in determining future direction. While the overall returns last week were really bad, there are parts of the market that have shown some “selling exhaustion”. As Jeffrey Saut noted in his weekly email, these “selling stampedes” typically last 17-25 sessions and last Friday was session 22 by my count. Saut says there are a few rare times that will go 27-30 sessions while the longest in his recollection is 41 sessions. Many technical analysts are concerned since we recently closed below the market low from December 2018.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/23/20

 

There were not many places to hide from the carnage last week. The large growth companies continued to go down slightly less than the small companies and large value companies. Large growth is down significantly less than the rest of the market for 2020 while small value companies are down nearly 43%. Defensive sectors such as consumer staples and health care had moderate advantages over the past week. Interestingly, the communication services and technology sectors have fared better than most throughout the selloff.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/23/20

 

Our friends at Bespoke Investment Group conduct an interesting analysis every few weeks to help us get a better view at various kinds of stocks. Their decile analysis is designed to identify many ways of looking at stocks; comparing stocks based on absolute price as well as relative valuations. The most recent analysis shows stock performance since the market peak on February 19th and helps us determine which stocks have fared better. As expected, the larger companies have done better than smaller companies. However, companies with lower valuations have performed significantly worse than companies with higher valuations. We’ve also seen companies with higher dividend yields underperform those with no dividend yield.2 It really can’t be overstated how unusual this is when looking at the history of past market declines. Normally, the lower valuation, high-dividend companies perform much better during a market decline as opposed to the more growth-oriented companies.

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

 

The one consistency we have seen since the last all-time high is the marked increase in volatility. Daily changes in stock prices have reached levels not seen since the Great Depression. The recent selloff holds the record for the fastest decline of 30% from prior all-time highs. Bespoke mentioned that we actually saw a record eight straight days of 4% daily moves in either direction for the market. That included:

  • The 7th worst day on record (March 12th)
  • The 10th best day on record (March 13th)
  • The 3rd worst day on record (March 16th)3

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

 

One suprising element of this market correction has been that price volatility has NOT been limited to the stock market. Bonds have also experienced record volatility in the past few weeks. Again, we would normally expect bonds to be the safe haven during a stock market correction but the bond market has seen similar volatility as the stock market over the last week. The ETF tracking long-term Treasury Bonds saw both the largest ever moves both up and down in the same week.4

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

 

Finally, we have seen similar volatility in the price of oil over the last few weeks. Bespoke notes that oil is now trading more than 50% below its average price ($43.10) since 1983. The last time we saw oil prices at this level was February 2002. Since March 9th, WTI Crude has seen its largest one day gain (March 19th) as well as the second, third and fourth largest single day declines (March 9th, 18th, and 20th).5

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

 

Our market indicators remain in positive demand mode on a long-term basis although we anticipate some changes with the close of quarter next week. The long-term indicator reflects the bull market that started in July 2016 is still in effect. The underlying determinants of that indicator tell us that investors still see U.S. stocks as the better place to be for now compared to their international counterparts. The short-term indicator actually saw increased demand from five different subsectors in the markets last week despite the negative performance.

Despite the massive volatility in bonds, interest rates remain at near-time lows. The 10-year U.S. Treasury bond went as low as 0.31% the day after the OPEC announcement and has since risen as high as 1.18%. The 30-year Treasury has seen less volatility but remains at a very low 1.55%. The Atlanta Federal Reserve Bank’s GDPNOW forecast is still anticipating 1st quarter GDP of 3.1%, although most analysts agree that recent events will definitely bring that estimate lower.6 U.S. mortgage rates remain very attractive for new home buyers and those who wish to refinance.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/23/20

 

While we expect to see many new adjustments to economic expectations in the next month, there are reasons to be optimistic. Our concern in January that stock market valuations were looking extended have now been addressed. The S&P 500 has seen the trailing P/E ratio (ratio of current price to earnings over the last 12 months) fall from 22.2 down to 15.9.7 We will have to adjust our views of P/E ratios once we get guidance of future earnings for U.S. companies. If actual earnings were to fall as expected, the P/E ratio would not be quite as favorable. This is the time to be very cautious about investing in certain areas of the market simply because they are cheap.

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

 

History has not been a reliable guide for analysts during this market downturn. We have seen numerous examples where the market completely ignored technical support levels or historical behavior patterns. However, it may be helpful to recognize what happens after a major market meltdown from prior all-time highs. Bespoke found six other times in the past when the S&P 500 fell 30% of more from prior all-time highs. The performance of the index following the decline provides some comfort that a rebound is expected.8 Based on our experience, the opportunity for long-term investors remains quite positive.

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

 

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, Jeffrey Saut, “Bottom?”, 3/23/20
2. Bespoke Investment Group, The Bespoke Report, 3/20/20
3. Bespoke Investment Group, The Bespoke Report, 3/20/20
4. Bespoke Investment Group, The Bespoke Report, 3/20/20
5. Bespoke Investment Group, The Bespoke Report, 3/20/20
6. Bespoke Investment Group, The Bespoke Report, 3/20/20
7. Bespoke Investment Group, The Bespoke Report, 3/20/20
8. Bespoke Investment Group, The Bespoke Report, 3/20/20

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