Market Pulse – Week Ending May 29, 2020

During the holiday shortened week ending 5/29 we continued to observe a rotation under the surface of the financial markets.  Lower quality, smaller companies, and cyclical sectors are being bid up at the expense of the larger companies who carried us through the crisis so far.  While it is encouraging that market breadth has expanded, with more companies other than large cap tech and healthcare being bought, we are not yet convinced that this trend change is sustainable.

Small companies, financials, leisure, retail, airlines/transportation, and energy have been rising more than the overall stock market for the past two weeks.  We welcome greater participation in the current rebound, which reflects increased confidence in more economically sensitive and cyclical areas of the financial markets. This suggests investors are more hopeful of a quick recovery. However, we feel that these hopes are misaligned with the economic reality resulting from the pandemic.

Sure, small caps have outrun large caps, and financials have outperformed big tech over the past two weeks, but at what point does the risk premium (ie:  excess return) of buying more economically sensitive and challenged areas of the market offset the additional risk?  In our opinion, capturing a few percentages more of the upside is not worth both the potential reversal and more dramatic downside in these economically sensitive names.  Hope has been increasing as the country starts to re-open, but the risk of a second wave is still very much on the table.  Only time will tell if the mass gatherings we observed over the Memorial Day weekend and the general cavalier attitude of those braving health risks in an effort to get back to normalcy will still allow the spread of COVID-19 to remain suppressed.  At this juncture we are unwilling to subject your assets to what we perceive as riskier areas of the market to juice your returns by a few percentage points.  Should we conclude that the re-opening of the country does not carry an increase in contagion, we may be willing to shift some of our large cap exposure to these other areas of the market, but they will have to earn their way into your portfolio and we are not yet there.  We would ideally like to see these pockets of strength working for a period of time longer than a couple weeks. Only time will reflect the areas maintaining strength relative to the broader market in general, and large caps specifically.

The week of May 29 started with a gap higher at the open on Tuesday and Wednesday, but then started to fade at the close on Thursday.  Friday’s late day reversal to the upside assisted in the market ending the week with a 3% gain.  Tuesday’s open higher launched the S&P above the key 3,000 level, which also brought the index above its 200-day moving average, an important level we noted last week.  However, as the week faded away, the index moved back down to near 3,000 and, as expected this 3,000 level is proving to be the near-term battle ground for determining the next direction of the market. 

As we look ahead to the summer months, a few areas are keeping us cautious, but optimistic.  The first is the ongoing tensions between U.S. and China, particularly now that China is exerting control over South Korea –challenging the country’s ongoing autonomy.  This can potentially further exacerbate global trade and supply chains and create further deterioration in foreign relations. It could also potentially increasing tariffs, and therefore reduce the future earnings of those U.S. companies that derive a substantial amount of their revenue from countries in the Far East.  Secondly, we are mindful that the enhanced unemployment benefits, as well as Payroll Protection Program lending programs will be concluding at the end of July.  The ending of these helpful sources of liquidity may very well dampen some signs of hope in a speedy recovery.

Last week we made no changes to your portfolios and maintained our current allocation.  We also maintained the small hedge using BTAL, which typically provides some level of gains to help offset days when the market is generally down.  We will continue to monitor the markets and keep you updated as we have in the past.

We hope you have enjoyed reading these weekly notes keeping you informed and up to date.  Here at TWG we are staying safe and healthy, and not rushing out to mass gatherings even though that is now a much needed and desired option.  Enjoying some distance-appropriate time with friends and family is a welcomed change from months past.  We hope you are doing the same.

Market Pulse – Week Ending May 22, 2020

We hope you had an enjoyable Memorial Day weekend.
For the week ending 5/22, the market was higher thanks to a strong Monday where the S&P 500 rallied over 3% and held onto those gains for the rest of the week. The primary catalyst behind this rally stemmed from a CBS interview with Fed Chair Powell where he unequivocally stated that the Fed is “not out of ammunition” and has plenty of tools available to avert further systemic challenges. Furthermore, Moderna announced on Monday that it had completed a successful trial of a COVID-19 vaccine. Together, this news helped the markets advance above the 2950 level on the S&P 500 (an area of resistance we continue to watch closely).
Powell and the positive vaccine discovery were two of the three narratives that are driving the market. The third being trade tensions between the U.S. and China. The U.S. administration declared that it will block Huawei, China’s largest mobile phone manufacturer, from receiving shipments of U.S. made microchips. They also alluded to a potential ban on listing publicly-traded Chinese companies on the various U.S. stock exchanges. Trade tensions are uncalled for in our opinion, as such tensions have the potential to rattle an already fragile market.
Through a technical lens, the fact that the S&P is now holding above prior resistance of 2,950 is encouraging. Each day the market stays above that level will help support further upside moves. The next technical level we are watching closely is the 200-day moving average at 3,000. A notable pop above that level, along with a rising 200-day moving average trend line would signal a longer-term trend change to positive. While the worst is likely behind us, global economies still need to get their financial engines running at full speed. We do anticipate the market to bounce around the 200-day level, and are very encouraged that the market has been able to repair itself and hold strong at current levels.
Enjoy the beginning of the summer months. We will write again next week.

Market Pulse – Week Ending May 15, 2020

As we arrive at the midpoint of the second quarter 2020, the immediate future direction of the market will likely be driven by the three “T’s” – testing, trials and treatment.

As we try to re-open the country, tracking the rate of new infections, hospitalizations and fatalities will become the focus. An increase in testing and trials and successful advancement of treatment will be necessary to inspire re-opening confidence. We will continue to use price observation as our primary metric to evaluate and potentially adjust the risk exposure in your portfolios.

Over the past two weeks, we have added a little more exposure to QQQ and XLG, bringing our cash levels down to low single digits across all managed portfolios. We are doing well as the market tries to break out above current levels, which are proving to be at the overhead resistance level at the S&P 500 2,950. After the initial surge from the March 23rd low the S&P has been flat for the past month and one-year period. Current levels are being supported by central bank liquidity and it is not too much of a surprise that the market is taking a pause at the current level. In order to stay at current levels, the COVID-19 curve will need to stabilize as the country re-opens.

Mid-quarter statistics indicate that our managed portfolios are down less than their respective benchmarks, while having taken approximately 20% less risk. This is based on comparing the standard deviation of your portfolio relative to its benchmark. It is encouraging in that as our process seeks safety, it has not been at the expense of missing out on rebounds.

We will continue to update you on a regular basis and follow our rules-based process. Until next time, please stay safe and continue to practice common sense when you venture out – wear a mask, wash your hands and stay six feet apart from those around you.

Market Pulse – Week Ending May 1, 2020

We hope everyone is staying safe and cautiously awaiting the gradual re-opening of our economy.
April ended the month on a down note, but the S&P was up over 12%, providing a strong rebound from the March 23rd lows.  Bonds advanced less than 2% for the month.
For the week ending April 24th we added to QQQ and XLG. For the week ending May 1st, we added a small amount to QQQ — bringing our “protected” portion of the portfolio down to 10%. As the market goes up, we add more risk to the portfolio, and should the market roll over and decline, we will respond accordingly in an effort to manage risk and seek balance between risk and return.
This past week saw the greatest number of companies reporting their Q1 earnings. While not surprising, most companies reported a decline in revenues and profits. Many are not providing forward guidance, given the lack of clarity regarding when economic activity will get back to normal. To be sure, the cumulative 30 million unemployment claims over the past four weeks suggest the economic recovery will take some time – likely months, and not weeks. The loss of jobs will create challenges to businesses big and small as the number of lost jobs, and the attendant slowdown in spending, is now being reported by corporate America.
A bright spot has been the earnings results from some of the largest companies in the world, Microsoft, Facebook, Amazon and Apple which reflected resilience and strength. The results from these companies, and the generally positive market response to their reporting, supports our tactical allocation decision to accumulate shares of only the largest and highest quality companies as we continue to build portfolios.
Coming out of March with a sizable cash position, it is expected that our portfolios would rebound less than their benchmark, which was the case during the month of April. Gains were between 7% for the growth portfolio to 5% for conservative. But the trade off is fair given how much less risk was taken as the market bottomed in late March. Year to date portfolios have performed in line with benchmarks but having taken substantially less risk in doing so.
What lies ahead for us now, no one can say. We remain confident that our government, fellow citizens and those leading the medical research will be working together to restore our confidence in the future and enable our country to rise from the ashes of this unprecedented pandemic. We will survive and we will be stronger together when we reach the other side.
Stay safe.