What's Going on in the Markets March 19, 2020

What a day. What a week. What a month.

The S&P 500 index lost another 5.2% yesterday - which is somewhat of a relief because it was down over 9% at one point during the day. The index did manage to close above Tuesday's low. That is potentially bullish. It's somewhat funny to say, but the NASDAQ 100 (QQQ) was the best performing of the major indexes, losing just over 3%. As daily swings of 3-5% become the norm, we become somewhat numb to them. Not fun.

Although there was no direct catalyst for the sell-off Wednesday, stocks erased nearly all of Tuesday’s big gains. Energy was massacred by another big drop in crude oil prices following reports that Saudi Arabia has said it will continue record-high oil production "over the coming months," accelerating its price war with Russia. Oil prices have been sinking as the Covid-19 pandemic reduced demand, and Russia in recent weeks failed to agree to an OPEC proposal to reduce oil production. West Texas Intermediate crude on Wednesday plunged a shocking 22.7% to trade at $21 per barrel. It is now at the lowest level since 2002! The good news? Lower prices at the pump....if you can leave your home.

Stocks found no relief from reports that the White House is urging lawmakers for $1 trillion in stimulus to cushion American workers and the economy from the impact of the coronavirus. Lawmakers were warned by the Trump administration that US unemployment could jump to 20% if no financial aid measures were passed. Lawmakers aren't wasting time getting stimulus to the markets and taxpayers, which is good news.

With the dual plight of an oil production glut and the coronavirus global pandemic, global commerce has been left at a virtual standstill and has undercut the lives and financial balance of millions of people who work in the service industry.

I have to say, this is one of the worst times I've ever seen in my 30-years in the markets.  Why? Because of the velocity and relentlessness of the selling. The Financial Crisis offered many opportunities to buy in, even while the market was falling overall.  Today's market has been a one-way street. Fifteen of the last twenty days have been down. Back-to-back up days haven't taken place since early February. Household names that would typically be the last ones to drop, have taken big hits.

On a positive note, all of the ingredients are in place for a large, multi-day oversold bounce. I'm not trying to paint a bright picture. Indeed, it is likely to take months of choppy or declining stock prices to work through the problems that have been exposed by the action over the past three weeks. But we will find a bottom, and I'm thinking sooner than later. All of the government stimulus and federal reserve easing being put out there is going to find its way into stocks one way or another.

Even during the worst bear markets, there are always very strong "rip your face off" rallies that work off the oversold conditions. We are on the cusp of one of those rallies.

At the lows yesterday, conditions felt worse than they did on the ugly markets of Christmas Eve, 2018. They also felt a lot like they did in October 2008. Back then, the S&P lost about 1/3 of its value in just three weeks. Then it exploded almost 20% higher in one week. In this market, we could get that in a day!

Of course, that wasn't the end of the decline. That didn't happen until March 2009. And, there were multiple swift declines and violent oversold rallies in the months in between. So, we're probably in for something similar for the next several months.

But, for the next few days, the market is set up for a "rip your face off" oversold bounce. We could see a 20-25% "pop" from here - which would boost the S&P 500 index back up towards 2,900 or so. A really wild move could get the index back up to 3150.

The bigger point is that yesterday certainly felt like a seller's exhaustion. That sets us up for an oversold bounce, which could be quite substantial. Following that, we're in for a several month-long period of big declines and big bounces as we carve out a bottom. Be ready for it if you're overexposed to the markets and have been "losing sleep". Use the bounces to reduce exposure or hedge your portfolios. We can help.

Whatever you do, this is not a market to chase big moves in stocks or funds. You will surely get another chance to get into this market if the rally is sustainable, so if you miss an initial move, be patient. You'll get many chances to buy back in. You don't need to be the first one into the foxhole.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What's Going on in the Markets - March 17, 2020

If you took a long hibernation nap starting on Christmas Eve 2018, woke up yesterday and looked at the markets, you'd think that nothing happened. As it turns out, the entire market rally since that day has been re-possessed in what has been the fastest 20%+ sell-off in history.

The Coronavirus infected market continued its downward ways as panicky investors dumped stocks in droves yesterday because of a feared economic recession. With the exception of treasury bonds, all stocks, sectors, industries, commodities (including gold and silver) were hit hard in yesterday's trading.  We are now officially in a bear market, with a mild recession (two consecutive calendar quarters of negative growth) hitting in the next few months being a much stronger possibility.

We have seen a lot of bear markets unfold over the past 40 years, but this one is unique in several aspects:

1.     First, the trigger came from an external event (i.e., Coronavirus) that is totally unrelated to monetary policy. In fact, the Fed has been aggressively “supporting” the market since its policy reversal in December 2018.

2.     Second, there were virtually no confirmation flags of a probable or imminent recession. Instead, consumer confidence was holding near 50-year highs, and the Leading Economic Index had just broken upward to a new all-time high.

3.     Third, the selling has been extraordinarily intense and indiscriminate. In some aspects, this reflects the type of selling panic normally seen near the END of a bear market instead of at the beginning.

The bad news is that we do not have many –or any– historical precedents upon which to rely with respect to the Coronavirus pandemic. The good news is that our client portfolios were defensively positioned with a high cash reserve and bear market funds prior to this panic selling, and has successfully protected against over 30-50% of the downside loss. And with our more conservative sector weighting, it would have been more resilient if not for the universal selling.

With yesterday’s market closing on the low, the volatility is clearly not over. History indicates it would be a mistake to sell additional holdings into this waterfall decline - at least at this time and without any solid warning flags of recession. Nonetheless, if you're worried about your portfolio and are losing sleep, then you probably have too big of an allocation to equities, and it would therefore be prudent to consider lightening up into any bounce that the market offers (which thus far have not lasted much more than an hour or two).

On Friday, President Trump declared the Covid-19 Coronavirus a national emergency, opening the door for an infusion of federal funds to ease the effects of the outbreak at home. In response, the DJIA (Dow Jones Industrial Average index) rallied more than 1400 points in the final 30 minutes of trading, erasing much of Thursday’s record down day.

Despite that positive reaction on Wall Street on Friday, this past weekend saw an escalation of Coronavirus impact and particularly of fear – with travel restrictions and business closures. Although this effect could still be transitory, it's possible that the unwinding of the Fed’s moral hazard (false investor confidence) on Wall Street could have a more lasting impact on the economic and stock market outlook. Even a 1% emergency rate cut and $700B of stimulus offered by the federal reserve could not stop another record decline in the stock market yesterday.

With market conditions as they are, a robust multi-day rally is expected. Indeed, after a lock limit down on the markets again yesterday at 7% down, we had a 5% lock limit up rally in the overnight futures market (Monday night). That could provide for a nice turnaround Tuesday if the bounce carries through the trading day.

While I'm getting calls and e-mails from clients concerned about how far this decline has gone, I'm also getting a lot of calls and e-mails about buying into this decline. Based on what I'm seeing, it seems to be a bit too early to buy, and probably too late to sell. While I thought we might have seen investor capitulation to the downside on the open yesterday morning, that thought proved fleeting as we briefly bounced and came back to close on the lows. That is not encouraging price action. And the fact that so many people are still anxious to buy this "dip" leads me to believe that the bottom is not yet in.

Nibbling on some stocks or funds at these levels isn't a terrible idea, but I prefer an approach that sees us bounce, see where the bounce runs out of steam, and watch for a re-test of yesterday's lows (to see if they hold) at some point in the near future. If the re-test succeeds, then it might be "off to the races" for the markets. If it fails, then look out below.

For that reason, I tend to be patient in buying back into a vicious bear market that will fool you into thinking that the selling is all over, only to drop your recent stock or fund purchase by 20-25% in less than a day.  Averaging down sounds like a great idea until you're down 25-50% on a position in a day or two. It's often better to wait for the re-test of the lows rather than jumping in with both feet too soon. Sure, the market could make you whole and profitable in a matter of months, but if you're looking to compound your annual returns at the highest rate possible, shortening the recovery period to get back to even makes patience essential.

In my opinion, it's probably better to use short-term market strength to trim some positions if you're overexposed to the markets and need to reduce overall risk. If you've been stressed out about your portfolio, IRA or 401(k), then use the bounces to reduce stock and bond exposure. It never hurts to reduce your risk, but please consult with your advisor (or me) before taking action.

According to Andrew Thrasher, CMT, comparing the current S&P 500 index decline to past bear markets, there hasn’t been a time in history that a bear market has begun with such a severe and speedy decline. Not the Great Depression. Not Black Monday in 1987. But out of every bear market before this one, a new bull market was born. This one will be no different. Just be patient as there will be plenty of time to jump into the next bull market.

Meanwhile, I hope you'll stay safe and healthy during this health crisis. Take every precaution you can to keep your family and you as healthy as possible. Like every crisis before this one, this one too shall pass. If you have any questions, please don't hesitate to get in touch with me.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: InvesTech Research

What's Going on in the Markets - March 8, 2020

On Monday, March 9, the market celebrates its 11th anniversary of this long bull market with the bull appearing quite tired, coughing and wheezing into that milestone. Yes, believe it or not, we are still in a bull market.

Despite the wild swings in the markets last week, the major indexes managed to close positive on the week for a change. Unfortunately, it was a somewhat hollow victory given that the worries over the Coronavirus have not subsided and an oil price war was started on Friday (read more below).

Volatility in the major indexes continued last week following the worst week of this bull market. Every day last week had a move of greater than +/- 2% as bullish and bearish investors fought for control.

The latest economic reports started out on solid footing with the ISM Manufacturing Index unexpectedly remaining in expansion territory. Likewise, the ISM Services Index beat expectations by rising to the best level in over a year. Mortgage rates have hit a new all-time low in a continued benefit to the housing market, with construction spending growth accelerating to the fastest pace in nearly three years. In a show of strength in the economy, the labor market remains resilient. Employers added 273,000 jobs in February, while jobless claims are near the lowest level in 50 years.

Nonetheless, from a market technical standpoint, it continues to indicate an elevated level of risk as evidenced by the recent volatility.  Dismal market breadth (the number of stocks that are up versus those that are down) over the past week suggests that there will likely be a continuation of this period of high volatility. On a positive front, the short-term selling pressure has put the market into oversold territory, indicating that there should be another attempted rally in the days ahead.

The Federal Reserve (the Fed) flew into action last Tuesday, cutting interest rates by 50 basis points (0.50%) in the first emergency cut since the Financial Crisis of 2008. Despite this move from the Fed, the strength in the U.S. economic data at this time does not suggest that this is the start of a recessionary bear market. The markets are expecting a  further rate cut when the Federal Open Market Committee meets on March 17-18.

As I write this on Sunday night, the futures (overnight) markets indicate a rough opening for trading on Monday, as fears of the overall economic impact of the Coronavirus continues to be priced in. In addition, a major oil price war appears to be breaking out as Russia and Saudi Arabia failed to come to an agreement on reductions in oil production, causing a plunge in the price of oil on Sunday. That will no doubt have a negative effect on stock prices this week, especially energy shares.

Regardless, it appears that the market wants to re-test the lows that we saw on February 28th. This is a normal technical progression, and hopefully, the lows will hold this week and we kick off a multi-week, if not multi-month rally.

According to the folks at Sentimentrader.com – who keep track of such statistics – “The last 10 times pessimism towards US equities was this extreme, the S&P 500 rallied 100% of the time over the next two months.” That's a pretty solid statistic.

It is going to be hard, perhaps painfully so, to watch as your portfolio holdings get hit with selling pressure along with the broad stock market. In this environment a little bit of selling pressure can do a lot of harm – especially when there isn’t much buying pressure to balance things out.

But this is a temporary condition. Think back to Christmas Eve, 2018 – the last time the market’s proverbial rubber band was this stretched so far to the downside, stocks snapped back within just a few weeks. And, selling into the downside panic was proven to be a mistake. We were back to record highs in a matter of months. As harrowing as this sell-off has been, by almost any measure except velocity, it remains a pipsqueak through Friday compared with the battering investors took at the end of 2018. In that episode, the S&P 500 plunged almost 20%.

I can’t say for sure the market will snap back now just as it did back then. Nothing is ever guaranteed in the stock market. But it's probably too late to sell right now if you haven't lightened up already. If you're too heavily invested, wait for a market rally to do so. And if your favorite fund or stock has declined enough to make it attractive, you can consider lightly "nibbling" on some here. Of course, if I'm not your advisor, then you should consult with yours, as this is not a recommendation to buy or sell any securities.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What's Going on in the Markets for March 1, 2020

As you well know, investors just experienced one of the worst weeks in recorded history in the stock market as fears over COVID-19 (Coronavirus) ramped up, and the number of confirmed cases increased. Over the last week, we saw 3 out of 4 days in which declining stocks outnumbered advancing stocks by more than an 8:1 margin. That has not occurred since 1939!

Is it time to batten down the hatches and prepare for a bear market (a bear market is one that declines at least 20% from the last peak)? I don't think so, at least not until we get more evidence pointing in that direction.

While I'm no medical student, Coronavirus could prove to be a temporary setback. But if it indeed accelerates the economy into a recession due to supply chain disruptions or causes demand for goods and services to fall off for more than 1-2 calendar quarters, then I think that we could fall into a bear market. Therefore, we cannot underestimate the potential effect of a disruption of the economic cycle.

At this point, we can only identify this as a probable market correction (something less than a 20% decline from peak to trough). In other words, we do not have definitive confirmation of a recession ahead, and we cannot yet say whether the final bull market top is in place.

From an economic standpoint, the risk of recession was low prior to the Coronavirus outbreak fears, and while there will undoubtedly be an economic impact from the virus, the signs of an economic contraction (negative gross domestic product or GDP) are still notably absent. In fact, Friday’s Consumer Sentiment report from the University of Michigan shows that optimism reached the second-highest level of this cycle in February. There will need to be a breakdown in confidence before a recession becomes probable.

On the market structure (technical) side, the data obviously deteriorated greatly last week in line with the correction in the market. The selling has been widespread and brutal. That being the case, the market has reached a deeply oversold reading, indicating that a robust rebound rally of some type should develop in the next few days, if not on Monday. The strength and breadth of that rally will be vital in assessing: 1) How much damage has been done to investor confidence, and 2) the probability that this bull market may be over.

If you are finding that your risk tolerance for this kind of market action is lower than you thought, then you should consider reducing your exposure to the stock market on any bounce. Of course, you should first consult with your financial advisor and not consider this investment advice or a recommendation to buy or sell any security.

Obviously, anything can change the landscape, especially a bazooka of money fired at the markets or a reduction in short-term interest rates by the federal reserve and other central bankers around the world. The markets were down much more on Friday before rallying hard in the last 30 minutes, a positive sign that we may be seeing the pace of selling slowing or abating.

Regardless, it is certainly possible that we may have seen the highs for the year (my crystal ball is still in the shop), but I'm open to what the market tells me. I'm not married to a single way of thinking (bullish or bearish) and neither should you. If the market can retrace over 60% of this decline on any sustained rally, then we might have a shot at targeting old highs. But that's a tall order, and it's going to take a while to happen if it does. Much of the technical damage has to be repaired, and a lot of disappointed regretful buyers are going to want their money back on any rally,  greatly increasing the supply of shares for sale in the short term.

Any first step in the right direction starts with arresting the current decline and successfully bounce this market for more than just a few hours or just a day. Based on the Sunday night futures markets, the current outlook looks to be for a positive open on Monday morning, despite the increase in the number of reported Coronavirus cases over the weekend. I suspect that market followers are expecting an announcement of an interest rate cut sometime on Monday.

For our client accounts, we have been reducing equity exposure for several weeks and adding hedges to our portfolios. We will continue to be defensive until we see signs that the market is stabilizing, and that a durable market low has been formed. For your part, don't be a hero: it may be too late to sell and it may be too soon to buy (but it may be OK to nibble a little). Again, I cannot advise you personally unless you become an investment-management client :-).

Over the long term, the market has always moved up, but volatility has always been the cost of enjoying higher returns in the stock market. With risk highly elevated, it may be time to do very little. Just know that this too shall pass, and better times may only be a few days, if not a few weeks away.

For now, just keep washing those hands frequently and stay home if you're sick. I can safely say that without needing a medical degree.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

What's Going on in the Markets for February 25, 2020

It wasn't a pretty day for the stock market fans on Monday with one of the worst down days in over two years. Does that mean the market is doomed and that we've finally topped? Read on for some encouraging news on post-smack down days like Monday, with some help from my friend and fellow market writer Jon D. Markman.

Investors seemed to panic on Monday over a climb in corona virus infections outside of the Chinese epicenter and also started to discount the possibility that the Democrats might nominate capitalism antagonist Bernie Sanders.

The Dow Jones Industrials Average started with a gap down and 500-point slide, made a couple of feeble rebound attempts, then closed on its low at -1,031 points with a 3.5% loss. The S&P 500 fell 3.35%, the NASDAQ 100 fell 3.9% and the small-cap Russell 2000 index fell 2.9%. This puts us about 5% below all-time highs as measured by the S&P 500 index, a normal and frequent pull-back level.

It was a bad day for sure, but in no way historic. Slams of 3.5% occur about twice a year on average, with something like 100 instances since 1928. The Monday slide was just the 48^th biggest one day drop for SPDR S&P 500 (SPY) since 1993. It was the worst Monday decline since way back on Feb. 5, 2018, when the SPY sank 4.18% for a reason nobody can quite remember.

Sure it’s sad that the corona virus has spread to Italy and other countries, but overseas events ranging from assassinations and full-blown wars to economic hardship and the ebola virus just don’t move the dial for U.S. investors, whose attitude is pretty much, “Sorry not sorry.”

This is a good time to remind you that the only reason markets care about the dreaded virus is that it could put a kink in global supply chains that reduce public companies’ recent guidance on future revenues and margins (i.e., overall corporate profits). So it’s really another recession scare, not a public health scare.

Investors are susceptible to the scare because global economic growth is already slow, with the latest annualized reading on eurozone GDP at just 1.4% and the U.S. not much better at 2.3%. That’s barely above stall speed, so it wouldn’t take much to knock the spinning top on its side. Nick Colas of DataTrek Research notes: “The combination of structurally low inflation, aging populations, and central bank balance sheet expansion has pulled long term interest rates lower, persistently signaling a brewing recessionary storm to market participants.”

As a result, investors ditched oil and gas assets in the wake of reports that the corona virus continues to infect more people worldwide. Iran, Italy and South Korea reported sharp increases in infections, according to Reuters. Italy now has the world's third-largest concentration of corona virus cases and the economy is "vulnerable to disruption from the corona virus, being at serious risk of slipping into recession this quarter," said analysts at Daiwa Capital Markets in a note Monday. I believe that a lot more evidence is needed to make the conclusion that we're at risk of a near-term recession.

Besides, the market has gone up pretty much uninterrupted since the beginning of October 2018 and was very much overdue for a rest. Monday's performance was a mere flesh wound to the charging bull (market).

The good news is that Bespoke (a market quantitative analysis firm) reports that 2%-plus drops on Mondays have historically been bought with a vengeance in the near term. Since March 2009, there have been 18 prior 2%+ drops on Mondays, and SPY (the exchange-traded fund that tracks the S&P 500 index) has seen an average gain of 1.02% on the next day – which is how "Turnaround Tuesday" got its name.

Even more impressive, over the next week, SPY has averaged a huge gain of 3.16% with positive returns 17 out of 18 times. And over the next month, SPY has averaged a gain of 6.08% with positive returns 17 of 18 times as well. Anything can happen, of course--this is the stock market we're talking about here.

The analysts also studied big declines on each day of the week. Turns out that in the month after 2%+ drops on Mondays, SPY has averaged a huge gain of 4.5%.

No guarantees, but investors tend to buy the trip when big stumbles start a week. Sure, it might be short-term, but the pullback so far merely takes back all of the gains we accumulated in February 2020, so we're still slightly up on the year as measured by the S&P 500 index. Can it get worse? Of course, it can, but we need more evidence that the long term uptrend is in jeopardy.

Those that haven't yet hedged their portfolios during this entire bull market run should consider trimming positions or reduce risk in their portfolios on any bounce. It never hurts to take some money off the table, as no one knows if we've topped or we're on our ways to make new all-time highs again. This is not a recommendation to buy or sell any securities-you should check with your advisor for the best approach that fits your goals, your risk tolerance and time-frame. For our client portfolios, we've done just that, and will do more of that should the pull-back deepen.

I think we'll get a quick bounce back, and then the market tends to go back and test the lows after a few days. If that low holds, then that could signal that this short-term pullback is over. If it doesn't, then more corrective work is needed to wring out some short-term excesses that are in the market.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.