Hello everyone, Adam here.
I’ve struggled to find a good topic for June’s post given how methodical (and unloved) the rise in the stock market has been over the past several months. Since April 1st, the S&P 500 rose almost 31% over the next 68 calendar days. Since then, it’s settled in nicely around 3000, which is not just an important psychological number for investors, it is also an important level technically speaking with the 200-day moving average currently sitting at 3021.
The tug of war in the marketplace continues and my honest thought is the market trades relatively sideways for another 3-4 months until more clarity exists around the two main issues. I’d like to focus on consensus thinking and how the future may differ from the current “most likely” scenarios.
- COVID-19 – My general read at the moment is that a vaccine or a treatment is months away at best, and, at the moment, there appears to be a “second wave” of positive cases and increasing hospitalizations. The market has priced in a bit of this “second wave” fear, but it remains to be seen if it is a temporary development, or if the worst is still in front of us.
- Presidential Election – When it comes to predicting the future, the only real pieces of information I use come from Las Vegas. Until I read something otherwise, the best handicappers of world events continue to reside in the desert. At present, Joe Biden remains a small favorite, but by no means has anything been decided. We have a long way to go until November, but I haven’t seen the markets really react one way or another just yet. Generally, this starts to present itself much more clearly as we approach October and final decisions are made for positioning prior to election day.
As it relates to the stock market, I see risk/reward metrics slightly skewed to the upside (not the downside). If the virus continues to get worse, the playbook will look similar to what we saw in the Northeast US, including strict lockdowns. This will cause pockets of economic activity to come to a screeching halt, but I believe (as we saw in March), the continued coordinated fiscal and monetary policy solutions will float the economy for a bit longer (extension of unemployment assistance, zero interest rate policy, corporate and municipal bond programs, etc).
From a numbers standpoint, since World War II the S&P has been up 15% or more in a quarter 8 times. According to Ryan Detrick of LPL, in all 8 instances the market was higher the next quarter, with the AVERAGE gain over the next quarter being 9.5%. Not so coincidentally, the S&P 500 has about 10% more to gain from this price level to get back to where it was in late February (where the fear began).
Two potential positive catalysts are a viable vaccine/treatment, or a move back toward the incumbent candidate winning the presidency. I don’t know what could happen, or why it could happen, but I just know that it CAN happen. In my opinion, we should be on the lookout for GOOD news being the surprise here, not more of what we’re seeing on the evening news and social media. This lends me to believe that pullbacks should continue to be bought aggressively until major price levels are breached (2850 area on the S&P 500 is BIG one if we make it there).
As always, we will reach out with Q2 performance numbers in the next week or so (spoiler alert: they are better than Q1). Have a fantastic shortened holiday week, and please be safe over the weekend!
– Adam