Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

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Seems like I have been mostly writing about the crazy, non-normal world we have been living in lately. And, since I just did so last Thursday, today I’m going to provide a market update that is probably a little heavy on charts and analysis. For those of you that tell me that you skip the charts, you might want to read this article and this article instead.

But before you run away, here’s some good news: The average return on all of our custodied SMA client accounts (most of our assets under management) has been -5.79% versus a loss of 20.7% by the S&P 500 and 12.79% for a balanced fund (after maximum advisory fees and applicable affiliated fee credits).

For the year to date, all but one of our strategies have bested the S&P 500, almost 87% have beat a balanced fund, and 88% have topped the S&P 500 over the last 12 months (after maximum advisory fees and applicable affiliated fee credits).

Finally, few realize that only one stock market index from the top 23 countries in the world is showing a positive return over the last 12 months (Switzerland, +0.9%). Most are down by double-digit percentages (the worst being a 40% loss in Norway), while the S&P 500 in this country has lost 7.3%. But at Flexible Plan, almost 70 of our strategies have been profitable and more than 30 have gained over the last year. In fact, 12 have posted double-digit-percentage profits, even after subtracting the maximum fee (which few pay)!

It’s a war out there

Since the coronavirus outbreak, a friend of mine, John McClure, who manages our WP Income Builder and Strategic High Yield Bond strategies, has been writing a column called “World War C.” It certainly does feel like the U.S., and the world for that matter, are at war with this virus.

If that’s the case, last week seemed like the battle at Normandy! We won a victory, but we still have farther to go and likely will see more losses and setbacks before the war is ultimately won.

The major stock market indexes finished up strongly last week. The Dow Jones Industrial Average jumped 12.8%, the S&P 500 Index soared 10.3%, the NASDAQ Composite climbed 9.0%, and the Russell 2000 small-capitalization index rocketed up 11.6%. The 10-year Treasury bond yield fell 16 basis points to 0.68% (two months ago it was yielding 1.5%), sending bonds higher. Last week, spot gold closed higher again at $1,628.16, up $129.51 per ounce, or 8.6%.

It was the fifth-best week since 1939 but only the 17th best going back to 1928. The 1930s were definitely the most volatile time in market history. Unfortunately, all of the upside volatility was more than matched by downside volatility, as is shown by this chart of all of the drawdowns during the 92-year history of the S&P 500 Index. This is something that should inspire caution in the days ahead.

As you can see, a few of the really massive losses ended in a V-shaped bottom. However, just as many were W-shaped, and the second dip of the “W” was lower than the first. For example, in 2008, it looked like stocks had bottomed by year-end, but further losses and a new low developed as we entered into March 2009. And while the 33% loss we have experienced definitely puts us in “grizzly bear market” territory, the last two major declines exceeded that by about 50%, and what’s happening to the world and the economy now seems even worse than what was happening then.

News from the front lines: Economic reports

Speaking of the economy, we saw the first of those horrific economic reports that I have been warning were on the way. On Wednesday (March 25), it was reported that the number of unemployment compensation (initial jobless) claims had jumped from near-record-low territory in the 200,000s to over 3.2 million. That was five times higher than the previous record high!

http://www.usfunds.com/media/images/investor-alert/_2020/2020-03-27/COMM-us-intial-jobless-claims-03272020-LG.png

It wasn’t any better on the other side of the pond. Business activity (as measured by the IHS Markit European Purchase Manager Index [PMI] in the European Union) has fallen precipitously to a record low as the virus has spread.

http://www.usfunds.com/media/images/investor-alert/_2020/2020-03-27/comm-covid-19-outbreak-leads-collapse-eurozone-03252020-LG.png

Of course, the concern here is that since GDP often moves as the PMI does, a descent into a recession may have already begun on both sides of the Atlantic. In fact, a move like that seen in our initial jobless claims number translates into an expected jump in the unemployment rate to 9.4% in March and 15.6% in April. This could easily lead to a 15% drop in GDP in the second quarter. Indeed, larger declines than that are already being forecast.

Much-needed aid

To put a dent in these dire numbers, Congress passed a $2.2 trillion stimulus package. This is more than the total individual and corporate income taxes collected by the federal government in 2018 ($1.888 trillion). Hopefully, the congressional package is a lot more immediately deliverable and targeted to those that really need it than the simple forgiveness of those taxes.

In addition, the Fed has been working overtime adding liquidity into the credit markets. This has sent the yields on one- and three-month Treasury bills down into negative-interest-rate territory, a first for the United States. In a matter of weeks, the Fed has added more than double its previous record in cash infusions.

http://www.usfunds.com/media/images/investor-alert/_2020/2020-03-27/COMM-fed-balance-sheet-03272020-LG.pngThe rescue operations of President Trump and his administration, the Congress, and the Fed are unprecedented. Eventually, our economy will be resuscitated from the coma that we find ourselves in now.

Along the way, these rescue operations may send inflation soaring and further ignite the price of gold. So far, gold and the rising (although volatile) price of bonds have softened the blow inflicted on portfolios by the stock market losses. As described earlier, that has certainly been the case for our client accounts.

http://www.usfunds.com/media/images/investor-alert/_2020/2020-03-27/COMM-gold-limit-losses-coronavirus-selloff-03232020-LG.png

Looking ahead

Looking at the technical indicators, last week’s rally generated all kinds of positive market signals. The strongest were the market breadth numbers. These represent the number of companies participating in the rally. Both on the number of issues advancing and the volume of advancing issues, the signals were near record levels. These have almost always generated a substantial market rally in the intermediate or longer term.

This—plus the relative strength of the weather-vane semiconductors versus the S&P, and a historically positive week for market seasonality this week—augurs well for equities. However, investor sentiment, while significantly worse than earlier this year, has not reached the historic negativity normally associated with a market bottom. And although last week’s stock rally did not move the market into overbought territory, it has moved out of the oversold rating. Furthermore, the fortuitous “golden cross” pattern (a bullish signal created when the 50-day moving average of daily S&P 500 prices crosses above their 200-day moving average) that we have been living under will end tomorrow, switching to the ominous “death cross” pattern (when the shorter-term moving average crosses below the longer-term moving average) associated with a continuation of this bear market.

On the home front

Our intermediate-term tactical strategies are mixed: The Volatility Adjusted NASDAQ strategy continues to be 60% short or inverse to the equity market, Classic is fully invested (QFC Classic is also 100% into our equity funds, but these Quantified Funds are much more defensively positioned), and our Self-adjusting Trend Following strategy is 60% invested.

Short-term stock market indicators remain negative. Our QFC S&P Pattern Recognition strategy’s equity exposure remains neutral.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure still shows that we are in a Normal economic environment (meaning a positive inflation rate and positive GDP). This will change when the next GDP report comes out. Our Volatility composite (gold, bond, and stock market) is now showing a High and Rising reading, which favors stocks and then gold over bonds. Although all have positive returns in this regime stage, this is the riskiest Volatility regime for stocks and bonds and the second riskiest for gold.

Parting thoughts

Ultimately, I think we can all agree that the direction of stocks, bonds, gold, and other commodities is likely to be determined by the state of the war on the invading virus. A good source of information, and one that is increasingly referenced by the administration in its strategic planning, is the Institute for Health Metrics and Evaluation (IHME).

IHME is an independent global health research center at the University of Washington, providing projections of the course of the virus infection. As the following graph shows, at its present rate of expansion, the maximum point of pain for the nation is projected to be April 15. By this gauge, we should be on the downslope by the end of April (although with daily deaths still almost triple the current level). Projections for individual states are also available on this site. 

This may be as good an estimate as we can presently have of when the turning point of this war will occur. Yet, studying the chart, it seems that the better our social distancing works, the flatter the curve becomes. While this is, of course, good for our health-care workers and the stress on our medical institutions, it is stretching out the time we are under siege. The date of the apex has been moving slowly out further in time, while, providentially, the estimated number of deaths at that apex and in total is shrinking.

This may delay the time before the final market bottom is in place, but markets aren’t everything. Money we can earn, but lives we must save to the extent we can.

Be safe and be healthy.

All the best,

Jerry



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