The strength of the rally has been truly something to behold. The backstop from the Federal Reserve coupled with positive news on the virus front (flattening of the curve, hospitals not being overrun, treatment possibilities) has ignited a powder keg over the last 6 weeks. And while there is precedent for going back to test the lows again (2008), this has no longer become our base case. This is currently the largest bear market bounce since 1950 (31% and counting for the S&P 500, per Ryan Detrick of LPL Research), so it begs the question, “Are we still in a bear market?” (I have no idea, by the way).
First, let’s take a look at what’s happening and not what we think is going to happen. Volatility remains and while I don’t think we’re going to all-time highs on the S&P 500 tomorrow, the pessimism regarding the future of America was as high as it’s ever been. Those negative feelings have started to fade as stock market prices have risen, and I’m suddenly reminded that there is “nothing like price to change sentiment” – Helene Meisler (and it’s her birthday today!). Coupled with a massive amount of people who flocked to cash over the last 6 weeks (per Bank of America/Merrill Lynch), this could be setting up for an even more epic rally. For perspective, 7 times as much cash was raised in March, as compared to when President Trump was elected in 2016.
“The market is caught between two titanic forces: The Fed’s liquidity tsunami and the unknowable shape of the economic recovery. Thus far, the market has staged a normal rebound from the shock decline, and normal expectations (where I am) would be some sort of test of the March lows (although not necessarily a deep one) at some point. The BIG question is whether or not this environment is “normal'”.” – Walter Deemer.
The S&P 500 is down 9.6% year-to-date. The Nasdaq 100 is UP 5% year-to-date. But it’s not just technology that has been outperforming. Individual mega cap names (the biggest companies) in healthcare, retail, and pharma have all traded at or within 1% of their all-time highs over the past month.
Today’s stock market environment is exactly why we don’t try and time the market. It’s too hard. It’s why professional traders hold positions for days or weeks instead of years. It’s why we’re spouting statistics about being close to fully invested at all times, in order to not miss out on the few days that really make a difference on the way back up (80% of the entire advance from the bottom has been in 4 trading days). It’s why going to 100% cash is not investing. Getting back into the market is always more difficult than selling your portfolio.
We rebalanced most client portfolios in late March and early April according to our methodology, and those positions have risen substantially. This maneuvering should allow your portfolios to return to high watermarks before the overall indexes. That’s its job. Please remember that the market’s job is to frustrate the maximum amount of participants at all times. From my own anecdotal data, the majority of individual investors are still bearish (although I have been getting some calls to “nibble” on some individual stocks).
From our previous posts and client communications we outlined the 2880-2900 area as our line in the sand if the market was going to turn. Since April 9th (over a month) the S&P 500 is up less than 4%. This adds to our feeling regarding the market being in a tug-of-war.
We still believe that the market will turn lower from this price range, but make no mistake, if the S&P 500 substantially takes out the high of last week (2955) on a weekly closing basis, we would expect the stronger sectors (Tech, Healthcare, Biotech, Communication Services, Semiconductors) to take out their all-time highs and we would turn bullish in the short term.
This is a change in tone from recent posts, and if you’re sitting on the sidelines, you better have a plan in place if the market doesn’t give you another bite at the apple. The way to make money trading in the stock market is simple, and Howard Marks says it best, “you have to be a contrarian, and you have to be right”. The problem right now is that the sentiment picture isn’t at an extreme, so judging which way the wind is blowing remains difficult.
Regardless, for those of your with assets you’re waiting to deploy, we will be reaching out individually to make sure everyone is on the same page.
Lastly, none of this matters without your health, so please stay safe, and I hope to see everyone in the very near future.
– Adam