TheMoneyGeek Unplugged

The unprecedented market volatility continued as Friday’s downside action capped off an otherwise strong week. A robust three-day bounce of about 20% from Monday’s lows saw us give back roughly 1/4 of the weekly gains on Friday.

Still, in all, it was a great week for the bulls. The stock market, as measured by the S&P 500 index, gained about 10.25%, reclaiming about 1/3rd of the bear market losses incurred over the prior four weeks. This doesn’t mean, however, that the bulls are out of the woods and ready to run free in the fields. Bear markets rarely end after only five weeks, especially when volatility remains as high as it currently is.

So far what we’ve witnessed this week seems to be classic bear market action. Whenever the markets get so far stretched to the downside, just like a rubber band, some sort of snap-back action is to be expected. Indeed, as I’ve described in previous postings, a “wicked rip your face off rally of 20-50%” was to be expected. So yes, we could get more upside in the short term.

What we have experienced in the markets over the past five weeks is a “waterfall” decline followed by a robust bounce that gets many investors to think that the worst may be over. Most of the time, after convincing many that it’s safe to jump back in, we get a reversal of the bounce. If, in turn, the reversal plays out in traditional fashion, then the lows that were hit this past Monday will eventually be revisited and tested to see if they’ll hold.

If the lows don’t hold, then anyone buying into the bounce will be holding “losers” and will likely join the selling with anything they bought into the bounce and then some. If the lows do hold, then we will likely see a more durable (lasting) rally which may confirm that the worst of the decline is over for the intermediate-term. That may be the “safer” time to make more meaningful additions to your portfolio (but check with your investment advisor or talk to us).

The optimists are hoping that the massive fiscal and monetary stimulus will backstop stocks and prevent that retest from occurring, or that Monday’s lows will hold. The pessimists are concerned that the uncertainty of the coronavirus and its economic consequences will keep buyers on the sidelines, and that more sellers will emerge.

The response of both the Federal Reserve and the federal government has been unprecedented. The Federal Reserve outright stated this week that it’s willing to provide unlimited monetary stimulus, announcing program after program, as its balance sheet exceeds $5 trillion for the first time. That’s $5 trillion with a “T”.  Yes, $5,000,000,000,000. Pause for a moment and let that number sink in. I’ll wait.

Similarly, the $2 trillion stimulus package passed by Congress and signed by the President on Friday is more than double the $800 billion package passed in 2009 to ease the Great Recession. These efforts will dampen the economic fallout that has already begun to take place, but the full impact that will be realized is still largely unknown. I believe that more stimulus is going to be necessary.

The somewhat expected explosion in jobless claims on Thursday to a record 3.3 million (it had been averaging about 220,000-230,000 for many weeks) coupled with Friday’s sharp drop in reported Consumer Sentiment (no surprise given what’s going on in the world) indicates that the ongoing economic damage will likely be significant.

While Monday may possibly have marked an intermediate-term bottom in the market, it remains to be seen if the risks which were identified in prior posts (e.g., stock market and real estate overvaluation, low-quality corporate debt levels at a record high, yield curve inversion) will be unwound or not. The excesses that have been built up over the course of this economic cycle in terms of stock market overvaluations, inflated housing prices, and low-quality corporate debt remain in place for the most part and are clearly risks going forward. The depth and duration of this recession will be determined primarily by what happens in these key areas of vulnerability.

As we navigate through this extreme volatility, we will depend on key technical indicators to confirm whether or not Monday’s low was the bottom. Because I have serious doubts that this is the case, we used the bounce this week to reduce our overall investment allocations to stocks and exposure to riskier corporate bonds for clients. The next several weeks should provide valuable insight into whether breadth (the number of stocks going up versus the number of stocks going down) and leadership are truly stabilizing, and just how much of the economic risk is actually behind us.

While we are seeing unprecedented government support, we are also experiencing an unprecedented event that will have ramifications for every single person in the world. It would be quite foolish to believe that this monumental event can be priced into the market very quickly or easily.

At some point, there will be exceptional opportunities and they will be even better if we remain patient and wait for sustained positive price action to develop. While this extreme volatility may be good market action for very short-term stock market traders, if you’re looking to build longer-term positions, it is still too early to put any substantial capital at risk.

Nibbling a little on stocks “here and there” is OK, but I recommend that you never buy a full position at once. Always ask yourself if you’re comfortable holding the position and adding to it if it went down by another 25-40%. If you’re not comfortable doing that, then it’s too soon for you to buy because you’ll likely sell at the worst possible time.

Enjoy the weekend and please stay safe. I am here to answer any questions you might have.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

As if we didn’t have enough adjectives to describe the week before last’s market action (unprecedented, brutal, relentless), there must be no more words to describe the terrible equity markets again last week, as a massive 4000-point drop in the Dow Jones Industrial Average (DJIA) was second to only one other over the last nine decades.

The other indexes (S&P 500, NASDAQ, Russell 2000) didn’t fare much better either, as the losses posted by the average stock and every market gauge over the last month have been staggering. I’m not going to sugar-coat it: this has been one ugly market.

Indeed, we are now in Bear Market #26 over the last 90+ years, and though the speed of this sell-off has been unparalleled, the magnitude of the decline (at least for the S&P 500 index) at present is a bit less than average. Unfortunately, that doesn’t mean it can’t get worse, but it also doesn’t mean it can’t get better.

Over the past year, as I met with clients for our annual reviews, I sheepishly explained the large cash positions and growing hedges (options sold against the portfolio and bear market funds), why I and other portfolio managers felt that there were very few good values in the market and that we were under-invested for good reasons. Heck, even the most seasoned of portfolio managers weren’t buying the best value stocks out there, and growth stocks trounced the returns on value stocks for years. Stocks like Microsoft, Apple, Facebook, Tesla, Google, Amazon, Netflix all marched higher on a seemingly daily basis, while great blue-chip value stocks like Haliburton, Schlumberger, CVS, and IBM languished in the bargain bin.

As I met with prospects over the past year, I know that I lost the business of at least two of them that had 90%+ exposure to the stock market. When I was asked what my plan would be for their portfolios, I explained that their portfolio risk far outweighed their personal risk tolerance and that I would immediately and significantly lighten up on stocks and stock funds. Needless to say, when I heard back from them, they said my approach was too conservative and decided to “go in a different direction”. I can only hope that they heeded my warning.

Day after day, week after week, month after month (after the December 2018 low), the markets would question my defensive stance, and no doubt quite a few clients were unhappy being under-invested and not making as much money as the markets were. Every market pullback from a new record high was aggressively bought up, and we had no choice but to nibble here and there, knowing that we might have to stay close to the exits on those purchases. I’ve been doing this a long time, and as I’ve said before, I’ve not witnessed such persistent selling without a robust bounce ever in my career, making unscathed exits nearly impossible.

What’s Next?

That’s enough about what’s happened. Most are interested in what’s ahead. More pain or gain?

Unfortunately, the market loathes uncertainty, and with the COVID-19 shutdown of most swaths of the nation’s economy, uncertainty is what we have in droves. Stocks trade on corporate earnings forecasts, and to-date, most companies have withdrawn their forecasts because of so many unknowns.

The stock market is what’s known in portfolio management vernacular as “a forward-looking discounting mechanism”, where the crowd sniffs out what’s to come 6-12 months in the future. Everything you know as fact today is already factored into the market, or so goes what’s known as “Modern Portfolio Theory”. When the markets are rising, they’re looking ahead 6-12 months out and forecasting what’s to come, and they must be positive on the intermediate-term future. The opposite is true as well.

What we’re witnessing in the daily “thrashings” up and down in the stock markets is the manifestation of the uncertainty as everyone tries to price stocks for “what’s next”. My best guess is that we’re still in for a rocky bottoming period with new lower lows likely ahead.

But it’s not all gloomy. While last week’s markets closed on the lows, we did see some “green shoots” to indicate that the volume of selling was waning, and there was some risk appetite returning to the markets. The small-capitalization stocks, often the riskiest of stocks, outperformed their “peers” on Friday. The volatility index did not make a new high on Friday. The number of stocks hitting their 52-week lows did not expand into the end of the week. And the number of stocks going up versus those going down got better (it’s called breadth in this business).

When Should We Buy?

I’m heartened and encouraged that, among the calls and e-mails that I received last week, the preponderance of them were asking, “when should we buy?” It’s the right question now, as we continue to navigate this volatile bear market, of when it will be safe to start buying.  In that regard, history can provide valuable guidance.

The 1987 bear market is one historical precedent that is perhaps most like today’s. Major indexes came off an equally frothy rally (as we’ve seen since December 2018) with the S&P 500 showing a strong year-to-date gain leading up to the August 25, 1987 peak. The bear market unfolded quickly after the top, losing 20% in just 38 days (this one in 2020 took 19 trading days). The bear market bottomed in December 1987 as selling pressure abated significantly and buying pressure took over. That led to one of the longest-running bull markets in history.

The Financial Crisis from 2007 to 2009 was a more protracted downturn that lasted 18 months. The lessons from that bear market include the observation that there are often enticing rallies on the way down which are called “bull traps”, such as the rebounds in March and July of 2008. Don’t get sucked into them.

As market losses deepen, it’s crucial to remember that headlines are the gloomiest near the market bottom, so paying attention to the media in March 2009 would have kept you out of the market for months, and you would have missed out on a 50% rally within just a few months. This time it’s no different — the fear mongers are out in full force with their 50% negative growth forecasts and S&P 500 index going to 1100 (down 75%) prognostications.

Stock market leadership is one of the most reliable indicators that a bear market bottom is in place. As a new bull market emerged in 2009, abating selling pressure and emerging buying pressure again provided the timeliest signal to start buying. Our client portfolios back then were defensively allocated with an invested position of about 50% (of maximum risk) at the March 9 bottom. As the selling abated and buying pressure ramped up, we quickly stepped up to 77% and then moved to 97% invested in June 2009 as other proprietary indicators confirmed the buying opportunity of a lifetime.

The important lesson is: Don’t try to second guess the bottom and don’t try to anticipate it. With no evidence of selling pressure abating and buying pressure pretty much absent currently,  I will let the weight of evidence tell me when the time is right to start increasing our invested allocation. Now is not that time; it’s far too soon to buy in my opinion (and that could change, tomorrow, next week or the week after).

Today, unfortunately, every indication is that this bear market probably has further to run as the economy comes under increasing pressure. As I wait for the evidence to drop into place, our high cash and hedged positions are now two of the most valuable assets in our portfolio as we approach that future buying opportunity, probably the best one we’ve seen in over ten years. Meanwhile, try not to get sucked into bear market rallies-use them to lighten up on positions if you’re overallocated to the stock market.

Never lose sight of the Warren Buffet quotation, “Unless you can watch your stock decline by 50 percent without becoming panic-stricken, you should not be in the stock market,” and we know that bear markets are not an unusual part of the investment process. It’s the price we pay for superior returns over the long term.

Of course, legendary investor Peter Lynch said it best: “The real key to making money in stocks is not to get scared out of them.” I’ll add, as I paraphrase well-known TV host Jim Cramer, no one ever made money in the markets by panicking.

Please be safe and stay healthy during this difficult period of time in our lives. Don’t hesitate to contact me if you have any questions or if I can be of any help.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: Investech Research

What a day. What a week. What a month.

The S&P 500 index lost another 5.2% yesterday – which is somewhat of a relief because it was down over 9% at one point during the day. The index did manage to close above Tuesday’s low. That is potentially bullish. It’s somewhat funny to say, but the NASDAQ 100 (QQQ) was the best performing of the major indexes, losing just over 3%. As daily swings of 3-5% become the norm, we become somewhat numb to them. Not fun.

Although there was no direct catalyst for the sell-off Wednesday, stocks erased nearly all of Tuesday’s big gains. Energy was massacred by another big drop in crude oil prices following reports that Saudi Arabia has said it will continue record-high oil production “over the coming months,” accelerating its price war with Russia. Oil prices have been sinking as the Covid-19 pandemic reduced demand, and Russia in recent weeks failed to agree to an OPEC proposal to reduce oil production. West Texas Intermediate crude on Wednesday plunged a shocking 22.7% to trade at $21 per barrel. It is now at the lowest level since 2002! The good news? Lower prices at the pump….if you can leave your home.

Stocks found no relief from reports that the White House is urging lawmakers for $1 trillion in stimulus to cushion American workers and the economy from the impact of the coronavirus. Lawmakers were warned by the Trump administration that US unemployment could jump to 20% if no financial aid measures were passed. Lawmakers aren’t wasting time getting stimulus to the markets and taxpayers, which is good news.

With the dual plight of an oil production glut and the coronavirus global pandemic, global commerce has been left at a virtual standstill and has undercut the lives and financial balance of millions of people who work in the service industry.

I have to say, this is one of the worst times I’ve ever seen in my 30-years in the markets.  Why? Because of the velocity and relentlessness of the selling. The Financial Crisis offered many opportunities to buy in, even while the market was falling overall.  Today’s market has been a one-way street. Fifteen of the last twenty days have been down. Back-to-back up days haven’t taken place since early February. Household names that would typically be the last ones to drop, have taken big hits.

On a positive note, all of the ingredients are in place for a large, multi-day oversold bounce. I’m not trying to paint a bright picture. Indeed, it is likely to take months of choppy or declining stock prices to work through the problems that have been exposed by the action over the past three weeks. But we will find a bottom, and I’m thinking sooner than later. All of the government stimulus and federal reserve easing being put out there is going to find its way into stocks one way or another.

Even during the worst bear markets, there are always very strong “rip your face off” rallies that work off the oversold conditions. We are on the cusp of one of those rallies.

At the lows yesterday, conditions felt worse than they did on the ugly markets of Christmas Eve, 2018. They also felt a lot like they did in October 2008. Back then, the S&P lost about 1/3 of its value in just three weeks. Then it exploded almost 20% higher in one week. In this market, we could get that in a day!

Of course, that wasn’t the end of the decline. That didn’t happen until March 2009. And, there were multiple swift declines and violent oversold rallies in the months in between. So, we’re probably in for something similar for the next several months.

But, for the next few days, the market is set up for a “rip your face off” oversold bounce. We could see a 20-25% “pop” from here – which would boost the S&P 500 index back up towards 2,900 or so. A really wild move could get the index back up to 3150.

The bigger point is that yesterday certainly felt like a seller’s exhaustion. That sets us up for an oversold bounce, which could be quite substantial. Following that, we’re in for a several month-long period of big declines and big bounces as we carve out a bottom. Be ready for it if you’re overexposed to the markets and have been “losing sleep”. Use the bounces to reduce exposure or hedge your portfolios. We can help.

Whatever you do, this is not a market to chase big moves in stocks or funds. You will surely get another chance to get into this market if the rally is sustainable, so if you miss an initial move, be patient. You’ll get many chances to buy back in. You don’t need to be the first one into the foxhole.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

On Monday, March 9, the market celebrates its 11th anniversary of this long bull market with the bull appearing quite tired, coughing and wheezing into that milestone. Yes, believe it or not, we are still in a bull market.

Despite the wild swings in the markets last week, the major indexes managed to close positive on the week for a change. Unfortunately, it was a somewhat hollow victory given that the worries over the Coronavirus have not subsided and an oil price war was started on Friday (read more below).

Volatility in the major indexes continued last week following the worst week of this bull market. Every day last week had a move of greater than +/- 2% as bullish and bearish investors fought for control.

The latest economic reports started out on solid footing with the ISM Manufacturing Index unexpectedly remaining in expansion territory. Likewise, the ISM Services Index beat expectations by rising to the best level in over a year. Mortgage rates have hit a new all-time low in a continued benefit to the housing market, with construction spending growth accelerating to the fastest pace in nearly three years. In a show of strength in the economy, the labor market remains resilient. Employers added 273,000 jobs in February, while jobless claims are near the lowest level in 50 years.

Nonetheless, from a market technical standpoint, it continues to indicate an elevated level of risk as evidenced by the recent volatility.  Dismal market breadth (the number of stocks that are up versus those that are down) over the past week suggests that there will likely be a continuation of this period of high volatility. On a positive front, the short-term selling pressure has put the market into oversold territory, indicating that there should be another attempted rally in the days ahead.

The Federal Reserve (the Fed) flew into action last Tuesday, cutting interest rates by 50 basis points (0.50%) in the first emergency cut since the Financial Crisis of 2008. Despite this move from the Fed, the strength in the U.S. economic data at this time does not suggest that this is the start of a recessionary bear market. The markets are expecting a  further rate cut when the Federal Open Market Committee meets on March 17-18.

As I write this on Sunday night, the futures (overnight) markets indicate a rough opening for trading on Monday, as fears of the overall economic impact of the Coronavirus continues to be priced in. In addition, a major oil price war appears to be breaking out as Russia and Saudi Arabia failed to come to an agreement on reductions in oil production, causing a plunge in the price of oil on Sunday. That will no doubt have a negative effect on stock prices this week, especially energy shares.

Regardless, it appears that the market wants to re-test the lows that we saw on February 28th. This is a normal technical progression, and hopefully, the lows will hold this week and we kick off a multi-week, if not multi-month rally.

According to the folks at Sentimentrader.com – who keep track of such statistics – “The last 10 times pessimism towards US equities was this extreme, the S&P 500 rallied 100% of the time over the next two months.” That’s a pretty solid statistic.

It is going to be hard, perhaps painfully so, to watch as your portfolio holdings get hit with selling pressure along with the broad stock market. In this environment a little bit of selling pressure can do a lot of harm – especially when there isn’t much buying pressure to balance things out.

But this is a temporary condition. Think back to Christmas Eve, 2018 – the last time the market’s proverbial rubber band was this stretched so far to the downside, stocks snapped back within just a few weeks. And, selling into the downside panic was proven to be a mistake. We were back to record highs in a matter of months. As harrowing as this sell-off has been, by almost any measure except velocity, it remains a pipsqueak through Friday compared with the battering investors took at the end of 2018. In that episode, the S&P 500 plunged almost 20%.

I can’t say for sure the market will snap back now just as it did back then. Nothing is ever guaranteed in the stock market. But it’s probably too late to sell right now if you haven’t lightened up already. If you’re too heavily invested, wait for a market rally to do so. And if your favorite fund or stock has declined enough to make it attractive, you can consider lightly “nibbling” on some here. Of course, if I’m not your advisor, then you should consult with yours, as this is not a recommendation to buy or sell any securities.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

As you well know, investors just experienced one of the worst weeks in recorded history in the stock market as fears over COVID-19 (Coronavirus) ramped up, and the number of confirmed cases increased. Over the last week, we saw 3 out of 4 days in which declining stocks outnumbered advancing stocks by more than an 8:1 margin. That has not occurred since 1939!

Is it time to batten down the hatches and prepare for a bear market (a bear market is one that declines at least 20% from the last peak)? I don’t think so, at least not until we get more evidence pointing in that direction.

While I’m no medical student, Coronavirus could prove to be a temporary setback. But if it indeed accelerates the economy into a recession due to supply chain disruptions or causes demand for goods and services to fall off for more than 1-2 calendar quarters, then I think that we could fall into a bear market. Therefore, we cannot underestimate the potential effect of a disruption of the economic cycle.

At this point, we can only identify this as a probable market correction (something less than a 20% decline from peak to trough). In other words, we do not have definitive confirmation of a recession ahead, and we cannot yet say whether the final bull market top is in place.

From an economic standpoint, the risk of recession was low prior to the Coronavirus outbreak fears, and while there will undoubtedly be an economic impact from the virus, the signs of an economic contraction (negative gross domestic product or GDP) are still notably absent. In fact, Friday’s Consumer Sentiment report from the University of Michigan shows that optimism reached the second-highest level of this cycle in February. There will need to be a breakdown in confidence before a recession becomes probable.

On the market structure (technical) side, the data obviously deteriorated greatly last week in line with the correction in the market. The selling has been widespread and brutal. That being the case, the market has reached a deeply oversold reading, indicating that a robust rebound rally of some type should develop in the next few days, if not on Monday. The strength and breadth of that rally will be vital in assessing: 1) How much damage has been done to investor confidence, and 2) the probability that this bull market may be over.

If you are finding that your risk tolerance for this kind of market action is lower than you thought, then you should consider reducing your exposure to the stock market on any bounce. Of course, you should first consult with your financial advisor and not consider this investment advice or a recommendation to buy or sell any security.

Obviously, anything can change the landscape, especially a bazooka of money fired at the markets or a reduction in short-term interest rates by the federal reserve and other central bankers around the world. The markets were down much more on Friday before rallying hard in the last 30 minutes, a positive sign that we may be seeing the pace of selling slowing or abating.

Regardless, it is certainly possible that we may have seen the highs for the year (my crystal ball is still in the shop), but I’m open to what the market tells me. I’m not married to a single way of thinking (bullish or bearish) and neither should you. If the market can retrace over 60% of this decline on any sustained rally, then we might have a shot at targeting old highs. But that’s a tall order, and it’s going to take a while to happen if it does. Much of the technical damage has to be repaired, and a lot of disappointed regretful buyers are going to want their money back on any rally,  greatly increasing the supply of shares for sale in the short term.

Any first step in the right direction starts with arresting the current decline and successfully bounce this market for more than just a few hours or just a day. Based on the Sunday night futures markets, the current outlook looks to be for a positive open on Monday morning, despite the increase in the number of reported Coronavirus cases over the weekend. I suspect that market followers are expecting an announcement of an interest rate cut sometime on Monday.

For our client accounts, we have been reducing equity exposure for several weeks and adding hedges to our portfolios. We will continue to be defensive until we see signs that the market is stabilizing, and that a durable market low has been formed. For your part, don’t be a hero: it may be too late to sell and it may be too soon to buy (but it may be OK to nibble a little). Again, I cannot advise you personally unless you become an investment-management client :-).

Over the long term, the market has always moved up, but volatility has always been the cost of enjoying higher returns in the stock market. With risk highly elevated, it may be time to do very little. Just know that this too shall pass, and better times may only be a few days, if not a few weeks away.

For now, just keep washing those hands frequently and stay home if you’re sick. I can safely say that without needing a medical degree.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.