|
February 29, 2020
Dear Friends, Family and Clients,
As many of you well know, there is a lot of fear in the news about the Corona virus, its effect on the stock market and the global economy.
The virus
is spreading outside of China, but total active cases are still falling. Active cases are the only ones that can spread the virus. Today 43,293 vs 44,314 yesterday. The press keeps reporting total cases, and deaths but not recoveries
The stock market set a record this week for the fastest decline in history. The market always takes the escalator up, and the elevator down. It would take me pages to explain why I think this is overblown hysteria, but I am going to do the best I can in as few words as possible. Choose the option below that best meets your interest.
The Shortest Reply Possible
Everything is going to be okay. This too shall pass. We had a lot of "cash" as a safety measure and want to buy stocks at this extremely low level. This is the emotional decline I have been waiting months for. The decline may not be totally over, but this is an incredibly attractive time to buy as the market basically gave up three years of gains in about 10 days. The S&P 500 is thisclose to its January 2017 high.
A decline of this magnitude doesn't scare me. I cut my teeth on the Crash of 1987, when I was a
27-year-old floor trader. When I saw this Barron's January 2020 cover, I knew it was the kiss of death.
An Intermediate Reply
In 2003-2004, it was SARS, or "Severe Acute Respiratory Syndrome"
In 2005-2006, it was the bird flu virus
In 2009, it was a new strain of swine flu. An actual headline: "Britain prepares for 65,000 deaths." Actual death toll in Britain: 360 over nine months.
In 2014: it was Ebola, where maybe two persons in the US died.
Economist Brian Wesbury noted in his regular Monday briefing that both the SARS and Zika outbreaks (the first and last of the five major epidemics before this one since 2003) saw declines in the S&P 500 approaching 13%. This time isn't much different.
Without belaboring the point: the super-spreader of SARS - a fish seller - checked into a hospital in Guangzhou on January 31, 2003, basically infecting the whole staff. The epidemic exploded from there.
On that first day of the litany of epidemics cited above, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), this past Friday the Index closed almost
245% higher not including dividends. I'm confident you see where I'm going with this.
In the meantime, I think the most helpful - and certainly most heartfelt - investment advice I can offer would be that you turn off the television set, and let's get down to the business of investing.
The Epic Answer
Since the Fall of 2019, the S&P 500 and Dow Jones Industrial had been on an absolute rocket ship to the moon. The problem is that about 10 stocks control 50% of the index movement. As I have stated in previous newsletters, I was expecting a decline and a "pop" of the bubble ahead of the 2020 Presidential election. Here are my previous newsletter alerts to what I believed was setting up.
- February 5, 2020, "Market Dementia"
- December 19, 2019, "The Most Expensive Home on the Block-Part 2"
- November 19, 2019, "Do You Remember 1989?"
- October 21, 2019, "Buying the Most Expensive Home on the Block"
- September 4, 2019, "Yield Curve & The Doomsday Recession"
- August 7, 2019," Cruel to Be Kind"
Like a rubber band over-stretched too far to the point of snapping, the S&P 500 rallied more than it should of; and now it overshot to the downside, way more than it needed to.
US Equities Still #1
Domestic equities remain in first place compared to international markets and fixed income / bonds. If this were truly a bear market like we saw in 2007-2009, Cash would rank first and Domestic Equites holding third or fourth place.
Since 1950, there has been a total of 51, 10% corrections (not including this current one) with an average total pullback of -17.9%. (Note: this includes 20% corrections. If we remove those 20% corrections, the average is -14.4 %.) Of the 51 10% corrections, 12 of those have resulted in a total drawdown of 20% or more. In other words, 23% of the historical 10% corrections have led to a 20% pullback.
On average, once the market hits the 10% correction level, it has taken an average of 59 days to find the ultimate bottom. That average number includes some markets like 2000 into 2001 that took 175 to find the bottom as well as 1976 to 1978, which was 285 days.
So, roughly half of the 51, 10 % corrections found a bottom with a month.
S&P 500 Index is Extremely Oversold & in a Negative Trend
The S&P 500 is currently -188% oversold (thru Friday) due to the recent downward price action. To put this drastic reading into perspective, the last time we saw an OBOS% of this magnitude recorded for the S&P 500 was October 9, 2008, and prior to that, the Crash of 1987.
Suffice it to say that this sort of event is rare. Additionally, with Friday's market action, the default chart of the SPX violated its bullish support line at 2960 before moving as low as 2860 intraday.
For the technicians, here are the quick stats.
50 day Moving Average: 3,266.02
150 day Moving Average: 3,092.24
200 day Moving Average: 3,047.18
Since the 50-day moving average is above the 150-day moving average and above the 200- day moving average, it's still technically positive. I can say with all humility and frustration that I have in virtually every single instance over the last 20 years, regretted not putting all of my chips into the market when this happens and riding out the storm.
As of Thursday's data, the Overbought / Oversold index (OBOS) on the oversold numbers looks like this. Large Cap Value takes the cake printing a -312% reading to the south side, which is grander than its reading in the worst of 2008! Another you can see near the bottom, is Large Growth printing a -200% reading.
 These reading could likely go lower, but the stretch of the rubber band is notable enough already. Consider how you are going to take advantage of any short-term opportunities that can help your Net Asset Value.
If "Go to Cash" or "Danger Will Robinson" alarms trigger shortly, we should consider that, but I would first factor in that equity pricing is possibly too oversold, and that factor may indeed need to take precedence.
The Bottom Line
This market pullback, correction, or whatever you want to call it has been fierce, to say the least, and as is the case with any correction each one, like snowflakes are completely different.
But as of the time of this writing, the long-term rankings remain positive. I suspect we will bottom in March or April 2020 and begin marching higher into the Presidential Election as the media chooses some other topic to focus on.
Optimism remains the only long-term realism.
To Be Clear
While short term indicators suggest a great trading opportunity, price discovery has been distorted for 10+ years, and will take many years to get back to normal. We still have $16 Trillion of negative yield bonds.
What I mean by negative yield, is when an investor ( pension, foundation) purchases a bond to receive income, the roles are reversed and the investor actually pays interest and doesn't receive interest.
It kind of like having a checking account that charges you a monthly fee, far greater than the money you make for the "privilege" of safety.
We have to deal with a 10- Year US Treasury Bond at 1.127% percent and a 30 year interest rates at a ridiculously low 1.67% percent. How is a retired person supposed to live? Things don't move in a straight line. Japan is still dealing with an asset bubble from 1989.
A Call To Action
Stock market volatility can remind us of how vulnerable our retirement assets truly are. Despite the evidence noted above, you may find that shifting a portion of your retirement assets to a tax friendly "hybrid" Long Term Care policy or contractually guaranteed monthly income stream from a fixed income annuity can shift today's retirement assets and redirect them for tomorrows (virtually) certain need of chronic care, a.k.a. assisted living, independent living, dementia care.
All we're doing is rearranging the furniture a little bit.
Let's schedule a review of your retirement plan to see if we're on track.
Respectfully submitted,
Bill
____________________________________________________________________________________
Footnotes: p.s. The history of the SARS epidemic, and of most if not all the others before this one, is very well documented by Wikipedia. The closing level of the S&P 500 on 1/31/2003 is from Standard & Poor's, as reported by Yahoo Finance.
|
