Framework for a path forward

March 30, 2020

Weekly Market Update, 2020-03-30. Last week US equity markets experienced historic intraweek volatility again. This time it pushed to the upside with the mid-week, three-day rally amounting to over 20% from its Monday trough to its Thursday intraday peak. And we experienced our first consecutive up-days in the market since early February. Global equity markets rebounded last week, led by the Nikkei (+17.1%), Dow (12.8%) and S&P500 (+10.3%). Consumer discretionary (+14.3%), health care (+12.8%) and materials (+11.7%) were the outperformers. And a framework for a possible path forward for the bull market became apparent this week.

Stimulus framework

The S&P 500 gained 10.3% last week on the fiscal rescue bill and additional moves by the Fed to support liquidity and lending. Even with this, the index is still 25% below its February 19 closing high. Congress approved the Coronavirus Aid, Relief and Economic Security Act (CARES Act) on Friday. This totals $2.2 trillion or 10.3% of GDP — dwarfing anything thrown at the financial crisis.

As we reviewed on our special Tuesday podcast, we saw some early signs of thawing starting about 10 days ago. Last week, corporate credit spreads retraced some of their previous sharp increases, despite massive new issuance. The Fed’s inaugural plans to buy investment-grade corporate debt helped calm the debt markets some. As it usually does, equity market volatility is lagging behind the calming in debt markets. We’ve enclosed a chart provided by Strategas at the end of this piece that shows while how rare the last 6 weeks have been, the outcome over the next year has been historically positive.

Virus tests coming

This morning, the S&P 500 looks to open up about 1% on the back of some positive healthcare news. This will come from both Abbott Labs and Johnson and Johnson. The FDA has approved a rapid diagnostic test for the virus developed by Abbott. Because it is similar to a standard flu test and delivers results within minutes, this test can be used in physician offices. Additionally, Johnson and Johnson says it has plans to start human testing of an experimental coronavirus vaccine by September of this year. As a result, it could be in emergency use by early 2021.

Work your plan

We want to reemphasize the importance of remembering your particular financial plan and investment allocation. Together, we based your plans on your goals, risk tolerance and time horizon. And we constructed it knowing that there are going to be periods of extended market decline. It is a part of being a long-term investor.

Everyone is going to feel fear when the stock market dips into bear market territory as it currently is. That’s completely normal, and it’s why your advisor and the investment team at Oak Harvest are here. We are here to help you deal with that emotional rollercoaster. And help prevent long-term investment decision making based on short-term events, fear or panic. We remain committed to making the best investment decisions for our clients on a daily basis.

Framework

You can learn interesting things by combining historical data in an attempt to find some clues or a framework for the path forward. The percentage of “net new lows” (highs minus lows as percentage of total issues) on the New York Stock Exchange got about as bad as we’ve seen in more than 60 years about a week and a half ago (-77%), with only October 2008 (-87%) coming in worse. See the chart below by Strategas Asset Management.

In the 2008 example, October marked the climax in the number of individual stocks making a new low. Although the S&P itself would go on to fall another -25% from 10/10/08 to 3/9/09 – by May of 2009. And two months later, that -25% deficit was entirely erased (i.e., the market was quickly back above the October S&P levels). Historically, that’s been the worst outcome +six months forward with the other three comparable observations (1966, 1970 and 1987) posting strong returns +six and +12 months out.

framework for path forward possibly seen in 2008-2009 eventResources

  • Find more information and help on our YouTube Channel.
  • Check out these helpful podcasts by Chris Perras, CFA®, here.

 

Weekly market updates contain general information and expresses views of Oak Harvest Investment Services. We believe that the data, articles and information cited are reliable at the time of creation, but this is not guaranteed. Content should not be regarded as personalized investment advice.

Views and opinions expressed may change without notice. And they do not constitute a recommendation, or an offer or solicitation to buy or sell securities. In addition, Oak Harvest makes no assurance as to the accuracy of any forecast made. Past performance is not indicative of future results. Investing involves the risk of loss.