Week 15 Sitrep

The current volatility in the U.S. stock market (even though it is upside volatility) continues to concern us regarding whether the correction is over. Daily performance in the 3-5% range is not normal market activity whether it is up or down. Thus, our professional opinion is that the market is not yet on the path to complete recovery. We do, however, anticipate an opportunity for U.S. stocks to move higher once the volatility subsides. Hopefully, that will begin to appear in the coming weeks! The U.S. markets finished a very volatile week last week down more than 2%. The small-company Russell 2000 Index was down nearly 7% on the week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/6/20

 

The routine trends for asset classes continued last week as large growth companies were down less than the rest of the assets. As stated above, small companies from the growth and value side were down more than 6%. The conservative sectors outperformed last week led by energy. The announcement late in the week that President Trump had helped broker a deal between OPEC nations to restart negotiations on production led to a large jump in oil prices. While still down sharply over the last year, the price of oil rose to $29/barrel by the weekend. For the year, the energy sector still hurts the most, down nearly 50%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/6/20

 

April is a month we can historically look forward to from an investment perspective. While most folks are stressed to finish their taxes and potentially writing checks for tax bills, the stock market historically enjoys a healthy month. Bespoke Investment Group reminds us that 80% of the time over the last 20 year we have experienced positive returns in April.1 We would especially appreciate that after a challenging first quarter!

Source: Bespoke Investment Group, The Bespoke Report, 4/3/20

 

Further fueling our hopes for positive returns in April is the historical research on markets that experience an ugly quarter. The S&P 500 Index finished down 20% for the first quarter of 2020 for only the fifth time since World War II. The pain was exacerbated by the fact that all of the damage happened in the last five weeks of the quarter. Fortunately, the incidence of positive returns after a steep loss in the quarter is very high. The S&P 500 Index averages positive returns in the following quarter more than 87% of the time.2

Source: Bespoke Investment Group, The Bespoke Report, 4/3/20

 

The positive returns over the next few months will not come easy as there are many headwinds for the U.S. stock market (and the U.S. economy) in recovering from the COVID-19 virus. The new quarter always welcomes earnings season as U.S. companies will begin reporting their first quarter earnings results next week. The outlook is not very good as most analysts believe the dramatic decrease in economic activity for March will definitely affect corporate earnings. According to Factset, stock analysts have reduced their expectations for earnings in the S&P 500 companies by 9.1%, the worst decrease since 2016.3 We will be watching actual earnings results closely since anlaysts tend to be a sour group and typically lower estimates more than actual earnings decline providing an opportunity for markets to rise on the earnings surprise.

Source: Factset Insight, John Butters, 4/3/20

 

We do not think anyone will be surprised that second quarter economic activity will be dramatically lower. The estimates for all economic indicators are being reduced but have a wide range of dispersion depending on the firm issuing the guidance. Comparable to corporate earnings estimates, analysts providing guidance on U.S. economic activity tend towards pessimism and it is not uncommon for actual economic activity to surprise on the upside. We encourage everyone to avoid speculation on economic projections and wait to see the evidence. The only evidence we currently see is measured in various activity levels for the first quarter. Bespoke reports that we have seen a 93% decline in travel volumes, a 55% decline in overall restaurant revenue as well as a dramatic decrease in hours worked for most small businesses.4

Source: Bespoke Investment Group, The Bespoke Report, 4/3/20

 

Our market indicators continue to reflect the volatility in stocks on a short-term basis. The short-term indicator has already changed four times in the last eight weeks. While the indicator remained negative over the weekend, we saw it change to positive on Monday, April 6th. That will be reflected on next week’s Sitrep unless we see a dramatic swing this week (always possible). The long-term indicator remains in positive mode as demand for U.S. stocks remains in a bull market according to our measures. International stocks have seen a larger decline in the indicator value and are getting closer to a potential change to bear status in the coming weeks.

Interest rates continue to fluctuate in recent weeks. The benchmark 10-yr U.S. Treasury Bond closed the week at 0.62% but closed on Tuesday, April 7th, at 0.72%. We are still seeing reports that the demand for U.S. bonds remains very high from international investors.5 Most European and Asian government bonds continue to trade with negative interest rates making them less appealing for investors. U.S. mortgage rates remain competitive below 4% while refinancing activity continues to move higher.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/6/20

 

Clearly, we expect to see tremendous changes in various forecasts over the next few months. Again, we are not surprised at the reduced expectations for the second quarter of economic results. The numbers to watch closely will be the expectations for the third quarter of economic activity as that will help us to see how quickly the U.S. economy can recover from the shutdown in March and April. We are encouraged by the reports of slower growth on the COVID-19 virus and believe the markets will appreciate them as well.

 

Many of our client conversations have centered around the massive amount of stimulus being offered by the Federal Reserve and the U.S. government. It is difficult to compare the amount and the speed at which this support is hitting the economy. While there are many potential bad outcomes to massive increases in government spending (potentially higher inflation, higher interest rates and future tax hikes to name a few), we admit that the Federal Reserve performed as they were expected during this mess. Total Fed assets have now risen 22% over the last two weeks and that is just the beginning.6 There is likely going to be additional fiscal stimulus from Congress over the next month as well.

Source: Bespoke Investment Group, The Bespoke Report, 4/3/20

 

Our webinar series has begun, and we will be hosting three webinars in the coming weeks.

  • Wednesday, April 8th – Monthly Portfolio Briefing for existing clients only
  • Tuesday, April 14th – Market & Investment Portfolio Updates
  • Thursday, April 16th – Retirement & Tax Planning Strategies

If you have not received an invitation for these but would like to join us, please reply to this email and we will be sure to send an invitation. We have been encouraged by the responses from the first few webinars and believe these will be a regular activity for us going forward.

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. Bespoke Investment Group, The Bespoke Report, 4/3/20
2. Bespoke Investment Group, The Bespoke Report, 4/3/20
3. Factset Insight, John Butters, 4/3/20
4. Bespoke Investment Group, The Bespoke Report, 4/3/20
5. Bespoke Investment Group, The Bespoke Report, 4/3/20
6. Bespoke Investment Group, The Bespoke Report, 4/3/20

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