Price
Source: dshort blog, Moving Averages April Update
Summarizing the chart above Jill Mislinksi wrote the following:
All three S&P 500 MAs are still signaling "cash" and four of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), and PowerShares DB Commodity Index (DBC) — are signaling "cash".This is the second month in a row that only IEF has signaled "invested" and the remaining four asset classes have signaled "cash." Prices rebounded in April 2020 as monetary and fiscal policy helped fuel short term improvement in the economy after the sudden economic stop in March. However, price trends from last month did not change enough to flip the Ivy Portfolio signals for any of the five asset classes. I'd like to highlight one additional price indicator as we start May, this is comparing the 5-month simple average to the 12-month simple moving average of exchange traded fund, SPY, using a monthly chart:
Please click on chart to enlarge.
This chart is for the period June 1, 2007 to May 1, 2020. The slope of the current decline of the 5-month simple moving average (blue line) through the 12-month simple moving average (red line) is considerably steeper than the prior four breaks in this indicator. Each crossover captured a deceleration in the macroeconomic environment. As investors search for help understanding the duration of this recession, this chart is a useful indicator to watch.
Sentiment
Source: CNN Business Fear and Greed Index
The CNN Business Fear & Greed index ended the month of April with a "Neutral" reading of 47. As of this writing on May 2, 2020 this index reads 42. If the rally off of the March 23 lows proves to be a bear market bounce then we should anticipate this indicator moving back towards "Fear" or "Extreme Fear" in the coming months.
Turning our attention to the VIX; it remains elevated with a value above 31. It declined substantially from its March peak, however it started trending back up on May 1 with a 37.19 closing value. As COVID-19 is showing us, unpleasant surprises could hit this market at anytime. For further education on the VIX, watch Hedgeye co-founder Keith McCullough's video: We're Still At Dangerous Volatility Levels.
Valuation
Source: MacroTrends S&P 500 to Gold Ratio
The recent high in the S&P 500 to Gold ratio was in August 2018. Right now most valuation measurements need more time to pass before investors can see the full extent of the pandemic slowdown on income statements and balance sheets. When asked about investing Berkshire Hathaway's cash during their annual meeting on May 2, Warren Buffett replied, "We haven't seen anything attractive." This sums up how most value investors view the current environment.
PSV (Price, Sentiment, Valuation) Summary
In the beginning of May price action according to the Ivy Portfolio system suggests being invested in only one asset class IEF. Sentiment ended April at "Neutral." Valuation work is challenging in this environment. As we start May 2020, valuations aren't cheap and solvency risk remains high for many entities.
Market Perspective
No one knows the duration of this pandemic because no one knows the path of this virus. A healthy economy needs a healthy population. This challenging period of time for investors will eventually present opportunities and pockets of value. Speaking on CNBC on April 29, Jim Bianco, founder of Bianco Research, captured the current investing environment when he said:
"I understand the market has been up a lot since the March low. But what I see in the market is a retracement rally that looks very similar to the first type of rallies that you get in protracted bear markets."To further illustrate the retracement rally point of view watch Kimble Charting Solutions founder Chris Kimble's presentation: How does the recent decline in stocks look “Eerily” like major bear markets of the past. Mr. Kimble and Mr. Bianco have been studying markets for decades and we all benefit from their perspective.
Another famous observation of markets is that the best six months of the year for stocks is November through April. On May 1, 2020, Jason Goepfert writing for SentimenTrader.com blog posted The worst six months are even worse during bad (so far) years. Mr. Goepfert wrote the following:
"When the S&P 500 was down at least 5% year-to-date through April, the months ahead were skewed more toward risk and less toward reward. It has been particularly dastardly over the past 60 years. The next 2-6 months were not pleasant."Please read Mr. Goepfert's article to review his analysis and charts illustrating this phenomenon.
When uncertainty is growing, I like to pause and study the realty of our current situation. We know U.S. GDP equalled $21.4T in 2019 and will be less than $21.4T in 2020. This relationship of year-over-year declining GDP, applies to almost every country on earth, which puts the scale of this crisis in perspective. Testing, treatment and/or a vaccine for COVID along with continued fiscal and monetary support is crucial to shaping the trajectory of our future outcomes. Many investors are trying to look past 2020 earnings into 2021. As Jay Powell said at the most recent Federal Reserve press conference,"ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near-term, and poses considerable risk to the economic outlook over the medium term." Typically the medium term means 12-24 months.
Situational Awareness
When financial planners asses a client's situation they start with an evaluation of their current situation. They review each clients' net worth statement and income statement. After making sure there is a logical plan for paying any debts and/or large future expenses (i.e. car purchases, house purchases, remodeling projects, college expenses, health expenses, business investments, taxes etc.), there is ample cash and insurance to meet emergencies, and each client has an updated estate plan the process turns to review the portfolio.
Portfolio analysis typically involves some form of a simulation of their retirement plan using software showing projected returns based on random distributions and confidence levels, often referred to as Monte Carlo simulations. Jim C. Otar --financial planner, author and President of Otar & Associates-- recently discussed this in his article, Math of Loss - Time to Recover. If you are a financial advisor or an investor, you must read his entire article posted on his website. He opens the article with the following quote:
"Markets operate in two different modes: Random (“normal”, as known in the Gaussian world) and Fractal (non-normal, extreme). My work on the luck factor (i.e. sequence of returns) about 20 years ago, indicated that markets are generally random about 94% of the time. It is fractal for the remaining 6%, split evenly between up and down directions."Non-Gaussian planning is often overlooked in the financial planning profession for reasons that are too countless to discuss here. Competent financial advisors often think to themselves during the client relationship, "Is this client in a position to get through anything?" Because advisors know, "You get surprises in this world." Unfortunately too many financial advisors feel comfortable when they plan for 94% of outcomes, forgetting how much non-Gaussian situations can derail an entire plan.
I'd like to end this update with a quote. I've been reflecting on this quote since I published the February Market Update:
"Although it's easy to forget sometimes, a share is not a lottery ticket. It's part ownership of a business." - Peter Lynch, American Investor and former mutual fund managerEvery business owner is wondering right now, what will be the duration of this recession? As businesses work through the impact of this pandemic, the planner in me asks," Are you in a position to get through anything?" Surprises happen and non-Gaussian planning matters.
As always, wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.--------------------------------------------------
Here's what I've been reading, watching and listening to recently:
- Racial Gaps in Financial Outcomes (JP Morgan Chase Institute)
- Hot Topic #14: Crude Oil BLACK SWAN ALERT with Jim Bianco (MacroVoices)
- Opinion: Thanks to COVID-19, Social Security’s day of reckoning may be even closer than we thought (MarketWatch)
- Economic ‘Doom Loops’ Get Harder to Avoid in 2020s (Bloomberg Opinion)
- From 3/2014: Our next big crisis will be a retirement crisis (MarketWatch)
- How Long Will a Vaccine Really Take? (NY Times)
- What if immunity to covid-19 doesn’t last? (MIT Technology Review)
- Natural disasters will push the US further into crisis mode (Popular Science)
- Timeline of the Coronavirus Pandemic and U.S.Response (Just Security)
- COVID-19 and jobs: Monitoring the US impact on people and places (McKinsey Global)
- Opinion: Stocks will revisit their coronavirus crash low, and here’s when to expect it (MarketWatch)
- How the Coronavirus Pandemic Has Affected Local Businesses Around the Country (Yelp EA)
- The coronavirus recession is severe, and the damage to the U.S. economy will last years (Equitable Growth)
- Student Loans and the CARES Act (Fidelity)
- #217 Dr. Lacy Hunt: The Road Through Deflation Toward Eventual Hyperinflation (MacroVoices)
