Week 19 Sitrep

At first glance, the markets took a breather last week and closed mostly unchanged from the week before. Please do NOT make that mistake – we saw some particularly important activity in the U.S. markets last week that could lead to a few tough weeks for investors. The S&P 500 Index closed slightly lower at 2831 while international stocks moved up more than 3%. The week was volatile seeing average daily index moves greater than 1% within each day. The S&P 500 is now down 11.8% for the year while the NASDAQ is down 3.8%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/4/20

 

Smaller companies experienced heightened volatility over the last two weeks. On paper it appears the small company indexes moved up 2-4% but that does not cover the whole story. The Russell 2000 index, primarily a proxy for small/medium sized companies, rallied more than 10% over a three-day period and then gave it all back within the next two days. Some technical analysts have indicated that recent moves in the indexes prove we are seeing a “bear market rally” that will end with stocks trading lower in the coming weeks. The energy sector continued its recent rally last week, up 3%. The energy sector is now up more than 83% since March 23rd – yet the sector is still down 44% for the calendar year.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/4/20

 

The S&P 500 Index has officially retraced 54% of the recent decline, however the index continues to struggle at the 2950 level. The index held the 50% retracement line at 2792 but cannot seem to close above the next hurdle, an important technical indicator called a “61.8% Fibonacci retracement” line. The S&P 500 has had historical difficulties around the 2950 level as it had struggled to close above that line in 2018 and 2019 before finally achieving the goal in June 2019. The index fell below 2950 in August 2019 before reclaiming the mark in early September and falling back below later that month. The S&P 500 caught support at 2954 back on February 27th and bounced slightly higher before resuming its decline on March 4th.2

Source: Bespoke Investment Group, The Bespoke Report, 5/1/20

 

Andrew Adams of Saut Strategy made the point last Friday that the S&P 500 Index has fallen below the “channel” it had been following in the recent recovery rally. He notes that stocks seem to be missing the extra boost they would need to close above the red resistance line that represents the 61.8% Fibonacci retracement.3 Last week had the potential to give stocks the good news they wanted as we saw all five of the major technology companies reporting earnings. Unfortunately there were a few disappointments, including Apple and Amazon, that left the index lower on Thursday and Friday.

Source: Saut Strategy, Andrew Adams, Trading Flash, May 1, 2020

 

This weekend celebrated the annual meeting of Berkshire Hathaway, which usually provides plenty of headlines quoting Warren Buffett. Mr. Buffett expressed frustration in his recent foray into U.S. airline stocks announcing that his fund has lost billions in the market correction. Buffett also indicated that the recovery will take longer than most realize and that investors should be wary of how the Fed will pay for the recent stimulus.4 We read many analysts over the weekend noting that the market increase over the last month reflects the massive stimulus the government has injected into the economy. Sven Heinrich of NorthmanTrader.com acknolwedged that the markets turned down last week at the precise moment when the Fed slowed its spending.5

Source: Saut Strategy, Andrew Adams, Trading Flash, May 1, 2020

 

Expectations for U.S. corporate earnings have been weak but actual results were slightly better last week. We are not overly excited since the announcements fell into the camp of “less bad” than what was expected. The overall earnings decline for the first quarter is now at -13.7% compared to the -16.1% we anticipated last week. Positive earnings surprises came from the technology and health care sectors with a small bright spot from a few energy companies. Factset Insight notes that if the current level of earnings remains then it will be the largest year-over-year decline since the third quarter of 2009.6 The six sectors showing earnings growth are dwarfed by the five sectors experiencing drawdowns.

Source: Factset Insight, John Butters, 5/1/20

 

The Federal Reserve Board held their regularly scheduled meeting last week. Chairman Powell expressed concern that the second quarter of 2020 may be the absolute worst economic quarter we have ever experienced. Powell went on to say that the Fed is doing everything in its power to help but they will not be able to save the economy by themselves.7 Interestingly, the initial economic data released last week shows the service sector leading the way down as health care services were responsible for half of the decline. Apparently the cancellation of elective procedures outweighed the impact of COVID-19 treatments.8

Source: Bespoke Investment Group, The Bespoke Report, 5/1/20

 

Given the volatile swings in markets recently it would be expected that our market indicators could be erratic, particularly the short-term indicator. That was indeed the case last week as the short-term indicator returned to positive on Wednesday. The number of individual subsectors showing strong demand exploded to the upside as all 36 sectors and subsectors moving higher. We will also be introducing a new indicator shown below named the Balance of Strength Signal. The general idea of the BOSS is that it measures the demand for cash compared to other major asset classes. When the demand for cash changes trend, the indicator will change to reflect the accompanying risk levels. We will offer more detailed explanations on our upcoming investment webinars.

There was little change in the interest rate markets last week as the 10-year U.S. Treasury Bond closed with a yield of 0.64%. Short term interest rates are largely correlated to the Federal Reserve policy and have hovered near zero since the Fed reduced rates in March. Long term interest rates, such as the 30-year U.S. Treasury Bond, are influenced heavily by economic growth. A rise in long-term interest rates would likely signify expectations for an economic recovery; the bond market currently says, “not yet”. Mortgage rates remain near all-time lows.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 54/20

 

Bespoke Investment Group provided their end-of-month guidance for seasonality. The month of May has historically been a weaker month than average for U.S. stock indexes. This would corroborate a long-held stock market legend of “sell in May and go away” that was traditionally meant to signify stock traders would sell positions before starting their summer vacations. Regardless of how the month finishes, we recognize that the stock market has been challenging over the prior three years. The current total returns for the S&P 500 Index show that the markets have trended much lower than their long-term averages over 1- and 3-years.9 Another long-held stock market axiom is “reversion to the mean” which says that current returns will usually revert to their longer-term averages. That would be a welcomed site right now!

Source: Bespoke Investment Group, The Bespoke Report, 5/1/20

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. Bespoke Investment Group, The Bespoke Report, 5/1/20
2. Bespoke Investment Group, The Bespoke Report, 5/1/20
3. Saut Strategy, Andrew Adams, Trading Flash, May 1, 2020
4. CNBC.com; “Here’s a Full Recap of Warren Buffett’s newsmaking comments”, Fred Imbert, May 2, 2020
5. NorthmanTrader.com; Sven Heinrich, Weekly Market Strategy, May 3, 2020
6. Factset Insight, John Butters, 5/1/20
7. Bespoke Investment Group, The Bespoke Report, 5/1/20
8. Bespoke Investment Group, The Bespoke Report, 5/1/20
9. Bespoke Investment Group, The Bespoke Report, 5/1/20

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