Week 9 Sitrep

If there were ever a week with both good news and bad news, last week would have been a good comparison. Although most major indexes hit new highs on Wednesday, February 19th, we were feeling a little concerned by the weekend, and the first two days of this week confirmed those concerns. Global markets have been sent markedly lower, starting last Friday and continuing through this writing on Tuesday afternoon. Most headlines would attribute the losses to significantly increased concerns over new cases disclosed of the Coronavirus in European and Middle East countries. The S&P 500 Index finished lower by 1.22% last week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/24/20

While the selloff on Friday affected nearly all stocks, the large growth stocks gave up double their large value counterparts. Perhaps it should have been expected, however the large growth stocks are still significantly outperforming for the year. The small value index is now showing a negative return for the year-to-date. All sectors except real estate posted negative returns for the week while technology was hit the hardest down 2.5%.


Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/24/20

There are many factors that could be assigned blame for the market weakness recently. The obvious headlines are pointing to the new cases revealed for COVID-19 (Coronavirus) in Europe and the Middle East. However, we are also seeing a stark market reaction to the success of Bernie Sanders in the democratic primaries. His proposed policies of moving the U.S. economy toward socialism are not sitting well with investors.

If we are going to consider all possible causes of the market concern, we must also realize that the S&P 500 had risen substantially in recent months. Frankly, the S&P 500 Index has risen substantially since the last economic recession in 2008. Some will say that the market was “due” for a correction based on the idea that the index will often fall 5-10% in a brief period after an extended run higher. Andrew Adams of Saut Strategy pointed out that the S&P 500 was bumping up against a technical point of resistance in recent weeks. His chart below reflects the points at which the index has risen in a traditional technical pattern constrained by the resistance line dating back to the March 2009 low.1

Source: Saut Strategy, Charts of the Week, Andrew Adams, 2/26/20

It is important for us to state that our investment committee does not believe this move down is the end of the current bull market. We do not see evidence of an economic recession in the coming months in the U.S. As always, we will continue to update our opinion bsaed on new evidence. Recent economic reports from December and January reinforce our view that the U.S. economy has rebounded from several lower readings in 2019.2

Source: Bespoke Investment Group, The Bespoke Report, 2/21/20

In the midst of the S&P 500’s very strong four-month runup, the index did not experience so much as a 1% decline on any day from October 19, 2019 until recently. The current magnitude of decline is in line with normal market corrections as the index has declined 7.8% from it’s last all-time high on February 19, 2020.3 It appears that investors were “looking for a reason” to take some profits on stocks. However, the recent drop in stock prices has left the S&P 500 more than two standard deviations below the 50-day moving average. The index remains in a healthy state above the 200-day moving average for now.4

Source: Bespoke Investment Group, B.I.G. Tips – Big Drops from All-Time Highs, 2/25/20

Despite the volatility of the last week, our primary indicators for U.S. stocks remain positive. Clearly there have been some adjustments to the composite factors that make up the indicators but not enough to change our outlook on risk. As we’ve mentioned before, the long-term indicator helps us to recognize if we can expect to be compensated for taking risk in U.S. stocks. The risk/return relationship has been steadily positive since July 2016 as the U.S. markets have remained in a secular bull market. Obviously, this indicator does not reflect the short-term market corrections that occur during the year. Our overall position remains positive for long-term portfolio’s while we are cautious about adding new money to the market due to the short-term indicator position.

One of the primary stories we continue to follow is the steady decline of U.S. interest rates over the last year. The 10-year U.S. Treasury Bond slid to 1.46% last week and currently sits at 1.33% as of Tuesday evening, an all-time low for the bond. The 30-year U.S. Treasury Bond has hit a new all-time low of 1.81% as well. European and Asian interest rates are also lower on the recent news.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 2/24/20

We have mentioned that interest rates typically fall as a result of economic uncertainty in the future. Clearly, the markets are not sure what to expect with the multiple threats we discussed earlier in the letter. However, we have also recognized that the demand for U.S. bonds continues to increase in a market with more than $10 trillion of bonds with negative interest rates in Europe and Asia.5 The key question now is whether the Federal Reserve will see a need to cut short-term interest rates at its upcoming meetings in March or June. According to Bespoke Investment Group, markets are pricing >90% chance that there will be at least one rate cut this year.6

Source: Bespoke Investment Group, The Bespoke Report, 2/21/20

Our client’s portfolios remain positioned cautiously with roughly 8-12% cash positions. The stock positions we own are focused exclusively on high-quality U.S. holdings and no current weighting in international investments. We continue to monitor the economic risk in Europe due to weaker growth expectations post-Brexit. We have witnessed the dollar reaching new highs against the European and Japanese currencies that reflect increased risk abroad. We will continue to monitor the risk/return relationships in the markets and act accordingly in the 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

1. Saut Strategy, Charts of the Week, Andrew Adams, 2/26/20
2. Bespoke Investment Group, The Bespoke Report, 2/21/20
3. Bespoke Investment Group, The Bespoke Report, 2/21/20
4. Bespoke Investment Group, The Bespoke Report, 2/21/20
5. Bespoke Investment Group, The Bespoke Report, 2/21/20
6. Bespoke Investment Group, The Bespoke Report, 2/21/20