In our “Green Shoots” post, dated March 20th, we outlined our view of how the markets could react positively over the coming days/weeks ahead even though the markets looked bleak. We believed that the market was oversold and was due for a rally from those levels. I’m happy to report that since the closing price on March 20th, the S&P 500 has risen 19%.
In our quarterly performance reporting emails, we mentioned specifically that the area of 2720 was a natural point where sellers could return to the market to lighten up their holdings. Today we reached this first checkpoint. While the market can still move higher from here (positive breadth and volume have been encouraging in the recent days) and we’re open to the possibility of 2900 on the S&P 500, I do believe Phase 2 of the traditional crash cycle is coming to an end. Phase 3, the eventual “retest” of the March 23rd lows, is most likely upon us.
Let me stop for a second and mention to everyone that there is no equation, no rule book, nor any secret decoder ring that predicts how this is going to shake out. We only have history as our guide. 2008 was an outlier of a retest in the fact that it went BELOW the old low in March of 2009. This also happened to mark a generational stock market bottom and a generational buying opportunity. Most of the time, the retest ends up being within 4% of the old low (not necessarily a ” lower low”), but each time is a little different.
The real reason for this post is to give some guidance moving forward. Today the S&P 500 reached the same price level it was in June of 2019. This means that the return for the S&P 500 over the last 9 months is 0% (surprising isn’t it?). While Phase 2 may be over, or may have a bit more to go, we are still in the camp of believing that the market will heading lower over the coming weeks.
So…if you’re a younger client and have a long time horizon, the traditional rebalancing (moving a small portion out of fixed income, into equities) remains our preferred method moving forward. For those of you who are taking income from your portfolios and using it for living expenses, we’re going to try and take the opportunity on this rally to move up the quality spectrum and get a similar amount of dividend yield from companies we believe are less likely to reduce or eliminate their dividends, and hopefully we could see some capital appreciation eventually as well.
Ideally if you’re sitting on cash and feel comfortable adding to your existing positions, or have been waiting on the right time to jump back in, our recommendation would be to do so on the retest (at the moment we feel this level is around S&P 2400).
For those of you who find yourselves losing sleep about market losses, feel like you’re not able to ride out another storm due to age or potential job instability, NOW is the time in this cycle to sell some of your equity holdings to insure that in the highest number of probable scenarios, you’ll still get to where you want to be at retirement and beyond.
If you find yourself in this camp, please call or email at your earliest convenience.
– Adam