Monday Morning QB - Market Observations:
- Dow Posts Biggest Weekly Rally since 1938 but Still Down More Than 20% Year-to-Date
- President Trump Signs a $2 Trillion Stimulus Package into Law
- Stimulus Package is the Largest Relief Bill in U.S. History
- Record 3.28 Million Workers Applied for Unemployment Benefits
- Federal Reserve is Willing To Do Unlimited QE (Quantitative Easing)…Strategy Used During the Great Recession
- The U.S. is Now the World's Leader in Number of Reported Coronavirus Cases
Monday Morning QB - Market Performance:
Stocks rebounded from multi-year lows, as investors appeared encouraged by the Fed's aggressive monetary policy actions and an unprecedented level of fiscal stimulus.
For the week, the Dow Jones Industrial Average rose 2,463 points to close at 21,637, a gain of 12.8%. The Nasdaq Composite rebounded 9.1% closing at 7,502.
By market cap, the large-cap S&P 500 rose 10.3%, while the mid-cap S&P 400 and small-cap Russell 2000 rallied 13.1% and 11.6%, respectively.
The conundrum is, should investors buy stocks before the market moves higher or sell stocks now that some of the losses have evaporated?
The Tale of Two Types of Investors – Should I Use Last Week's 10% Return to Buy or Sell?
Last week the calls and conversations moved from unison concern to a split between “put me back in” or “take me out.” Both Fear and Greed reactions were on full display.
Some are fearful that the stock market will continue to go down, and last Tuesday’s gains were all they needed to feel good about abandoning the stock market entirely.
While others were looking for Federal Reserve action and the Government stimulus packages as the green light to go all-in on the stock market with concerns of missing out on the recovery.
Both types of investors are showing their impatience with the current market environment, but who is right?
The answer, of course, is "only time will tell".
I believe both investor types are being misled, because when pressed both types are reacting to their gut!
One’s gut feeling or overwhelming emotion should not be the barometer for sound investment decision-making.
Don’t take my word for it. Stocks are the only market that I am aware of that people run away from the sale when the price goes down.
Panic Is NOT an Investment Strategy
Managing risk is an integral part of sound money management.
We can control risk, but we have no idea what one’s portfolio returns will be tomorrow, next week, or next month or whatever time frame you like.
Gains or losses are determined by looking at the stock market through the rear-view mirror.
Our current stock market has experienced the fastest correction (likely leading to a recession) in the history of the stock market. So I don’t blame people for wanting to get out of the market after a 9.3% return on “Turn around Tuesday”.
Tuesday felt like the first opportunity in weeks to sell down your percentage of stocks to a level that allows you to sleep at night if you are in the Fear camp.
However, what makes you feel good is NOT the basis for sound strategy. Sound strategy, when implemented, can be quite uncomfortable.
Trying to Buy the Bottom of a Bear Market Can Be Hazardous to Your Wealth
While one type of investor was improving their sleep patterns, the other kind of investor was nervous about missing out on all the stock market gains yet to come.
Their thinking? I have already missed 10%, and I don’t want to miss any more of the recovery.
To their credit, they clearly remember the opportunity to gain which they missed by not investing at the market bottom during the Great Recession of 2008 – 2009.
This type of investor has seen what “buying the dips” has produced throughout the 11-year Bull market run and wants a piece of the dip before it’s gone.
These investors are tired of listening to the market false alarms and worry this correction will end before they have a chance to profit from it.
The caution here is the difference between buying the dips during a Bull market versus buying a bounce during a Bear market.
These two may have the same feel but the results can be very different.
We are currently in a Bear market.
Impatient With Our Risk Management System?
Both types of investors are acting on emotion.
Sadly, there is only a 50:50 chance of being right, no matter your position. One side or the other will mistake a decision made with emotional impatience for knowledge.
We don’t have the benefit of hindsight to guide us, so as investment professionals, our role is to fight through Bear markets, looking for opportunities to invest and to divest as appropriate.
We must apply risk management controls to your portfolio.
Knowing how to handle fearful times can create the best opportunities to avoid regret once the dust settles.
We live with the stress of the day in the hope that you can find comfort knowing that we are vigilant and following a system built for risk control.
We don’t rely on our gut. Ours is no better than yours.
We do rely on risk mitigation techniques because people and money are not rational, and any concept that starts with investors always making the “right” choice, in our humble opinion, is laughable and should be dismissed.
Benjamin Graham, the "Father of value investing" and Warren Buffet’s mentor, plus most of the investment community during his time did not believe in market theories based on “rational markets”. They thought the markets were a whirlwind of emotion and, therefore, inefficient.
Inefficient they believed meant that at times markets were/are susceptible to booms and busts, black swans if you will with their potential for severe consequences.
Let's not forget some of the recent examples like the Technology Bubble of the late 90's, or the 9/11 attacks, the Housing Bubble that led to the Great Recession of 2008 - 2009, and now the coronavirus pandemic.
Our Four Indicator System
Our Four indicator system looks at where we are right now.
As a reminder, we use two short-term indicators, a quarterly indicator, and a long-term indicator to determine how much risk is appropriate at any time within a client’s portfolio.
If all four indicators are positive, we will invest the maximum percentage in stocks that your risk tolerance will allow. If all four indicators are negative, we avoid the stock market entirely.
If the four indicators are not in agreement, a mix with some positive and some negative, we declare a Neutral stock market condition.
The balance of how much risk is appropriate depends on how the signals are leaning- toward positive or negative. The higher the number of positive signals, the more we will look to add to stocks. As the indicators turn negative, we reduce your stock exposure with each occurrence.
After last week’s market action, the short-term signals reversed, and are now both positive. However, without a market miracle between now and Wednesday, the quarterly indicator will be negative come April 1st.
This result will be unsatisfying to both the "get me in" and "get me out" investor.
In Neutral, some exposure to the stock market is prudent. Not 100% out or 100% back in!
History Lessons From the Great Recession
The peak of the stock market (before the Great Recession took hold) was September 10, 2007. From that day until the very bottom of the Great Recession, March 9, 2009, the S&P 500 index would go on to lose 56.8% overall.
The index did not just go straight down then straight up. There were times to both add money and subtract money from your stock positions.
So whether you think the worst of it is over or not, based on the Federal Reserve’s unprecedented action combined with the most massive governmental stimulus package in history, the outcome is yet to be determined.
Based on risk management as our guide, the current unprecedented measures improved our short-term indicators, and money was moved from cash back into the stock market.
Now, time will tell if the market goes up more from here or this upward move was just a glimpse of hope before more darkness occurs.
What I do know is that during the Great Recession, the market experienced extreme volatility.
What follows is some of the market action during the Great Recession.
September 8, 2008 - the S&P 500 gained +5.09%
September 15, 2008 - the S&P 500 dropped – 4.88%
September 18, 2008 - the S&P 500 gained +4.33
September 19, 2008 - the S&P 500 gained +4.03
September 30, 2008 - the S&P 500 gained +5.42%
October 7, 2008 - the S&P 500 dropped – 5.74%
October 9, 2008 - the S&P 500 dropped – 7.62%
October 13, 2008 - the S&P 500 gained +11.58%
October 20, 2008 – the S&P 500 gained +4.77%
October 22, 2008 - the S&P 500 dropped – 6.10%
October 28, 2008 - the S&P 500 gained +10.79
November 4, 2008 - the S&P 500 dropped -21.33%
November 13, 2008 - the S&P 500 gained +6.92%
November 19, 2008 - the S&P 500 dropped – 6.12%
November 20, 2008 - the S&P 500 dropped – 6.71%
November 21, 2008 - the S&P 500 gained +6.32
November 24, 2008 - the S&P 500 gained +6.47%
December 16, 2008 – the S&P 500 gained + 5.14%
January 2, 2009 - the S&P 500 dropped -10.58%
January 20, 2009 - the S&P 500 dropped -10.55%
March 9, 2009 –the S&P 500 dropped -15.9%
March 10, 2009 – the S&P 500 gained +6.37%
March 23, 2009 - the S&P 500 gained +7.08
Volatility Is Not Inherently Bad, but It Is the Cost of Building Wealth Over Time
If you are not currently taking distributions from your portfolio, looking for opportunities within this market is a great idea.
Buy and hold means you plan to wait out the entirety of the Bear market and even add to your positions should the stock market decline again from here.
Otherwise, be careful not to let your gut interfere with sound risk management.
A lesson from the Great Recession that our current policy makers appear to have learned is "Go Bigger".
There is a belief that both the Federal Reserve and our Law Makers combined with our Commanders and Chiefs during that time did not respond fast enough or big enough during the Great Recession.
This time around, ALL involved went bigger.
The stimulus bill and the degree of quantitative easing have been unprecedented, so let’s hope their efforts lessen both the length of time and the degree of our current crisis.
We will continue to rely on our risk management system to guide your portfolio allocations.
Thank you to all our clients for your trust and confidence during these trying times.
It’s Ok - Keep the calls coming!