Weekly Market Update, 2020-05-18. Time in wins again. Much to the dismay of the financial news channels, equity markets are up over 3% on weekend. This was spurred by comments of Chairmen Powell, strong oil prices and positive vaccine news from Moderna.
This proves again that it’s really hard to time investments in and out of the market, but long “time in” investments win. And more so, if one chooses to sell “red” and buy “green.” This is because only a few days out of each year make up most of that year’s annual gain. And those are hard to catch on the fly. As a result, you need to “stay in it, to win it” over time.
“Time in” vs. trendy “smart”
Last week, equity markets pulled back early in the week on more dire “smart money” warnings of “this time it’s different.”
The S&P 500 fell 2.3% on the week, with a heavy 9% decline in banks, and steep drops in industrials (-5.9%) and energy (-7.6%). This is the rotation that happens when long term rates rally. Value and small caps lag.
Market gaining before good news is announced
The market is moving ahead of positive economic news as it always does. Again, “time in” investments are benefitting in this in-between period. As we highlighted way back on March 23, in “heeling signs emerge”, the market is focusing on the shape and timing of the recovery.
Flattened Covid curves, not volume-reduced
On that note, it is concerning that some of the countries that were initially most successful in bending their COVID curves down (South Korea and Germany) reported upticks in cases with easier controls in place. The markets and North American policymakers will be watching those experiences closely in the coming weeks, which could help shape re-opening and recovery prospects in this part of the world.
The team at OHFG has expected and continues to expect this rally to peak short-term post May, pause and backfill in the June “deadzone” on the back of an uptick in virus cases post Memorial Day weekend. Our contacts already are pointing to a re-acceleration in Houston cases following the early reopening of our city 2 weeks ago.
Positives going forward
The S&P 500 has managed to retrace 50% of its losses (Feb highs to 3/23/2020 lows) and as we have noted in recent comments, at 2,834, the S&P 500 is sitting between two key retracement levels 50% (2,794) and 62% (2,934).
Because there was a more-than 30% rally from the 2,200 lows, investors have the impression a lot of firepower has been used up as investors chased this rise.
Surprisingly, this is not what has happened. There is still a lot of cash on the sidelines. There are $4.8 trillion in money market assets, about two-thirds of which is institutional. And this is an all-time high. Total retail money market assets are $1.57 trillion, exceeding the prior all-time-high of $1.4 trillion on Jan. 14, 2009. Hardly a bullish stance by investors.
The next catalyst could be that money market assets only retraced 28% of the rise in balances verses more than 50% retrace for S&P 500. This total amount of money market assets is 16% of equity market cap. This is down only modestly from 18% on March 3, 2020. And it was 11% at the market highs.
In other words, this is a lot of dry powder on the sidelines.
“Time in” investments gain
Stocks have managed to claw back half its losses, even as cash balances have barely declined. The S&P 500 has retraced more than 50% of its losses (at 2,864). Yet, money market assets only retraced 28% of their increase in balances.
This is positive for risk/reward. And especially if the Fed is “not out of ammunition”
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