June 2020 – Market Pulse Archive

For the week ending June 19th, the S&P 500 closed 1.86% higher, fueled by additional Federal Reserve support via an additional liquidity program targeting individual bonds bought by the Fed. Market participants always love additional accommodation from central banks, and this week was no exception even in the face of COVID spikes in several southern states.

Monday’s big reversal day set the tone for another volatile week, with the pre-market indicating a big gap down at the open. But then the Fed announced their bond buying program, and the market reversed early day losses to close up around 1%. Tuesday continued the ascent of the market, helped by Fed chair Powell’s congressional testimony, indicating ongoing and continued support of the markets via liquidity regimens. Powell’s stated that, “ we haven’t even talked about talking about raising rates ,” implies that rates will stay low for quite some time, perhaps encouraging market participants to choose equity yields instead of bonds. Also helping the positive sentiment was the May retail sales data which was 17% higher than April. This data was much better than expected and lends to the optimistic tone of improvement in the economy – another data point reflecting that the worst is likely behind us.

By Wednesday the market flattened out and finished marginally higher. Thursday’s pricing action, while on extremely low volume, closed marginally higher as well, showing the resilience of the markets desire to keep moving higher. Friday the S&P closed down over .50%, but still leaving the broad market positive on the week. Bonds closed the week with small gains.

We utilized the additional notion of Fed accommodation to invest the majority of cash still on the sidelines into SPY and SPTM. We are confident that the Fed’s most recent announcement, even if they actually don’t have to purchase bonds, will further support the market above its 200-day moving average. Sometimes it simply takes the perception of central bank action and not necessarily the action itself to prop up the market and provide participants extra confidence.

Notable strength was observed in the NASDAQ and large growth favorites, as QQQ and XLG gained 3.5% and 2.2% respectively, handily outperforming the broad market. QQQ and XLG are the two largest positions in TWG’s managed portfolios and have been since the March 23 ^rd cycle low.

The managed portfolios have outperformed their respective benchmark for the past two weeks, with the first week being down less, and last week being up more than the corresponding benchmark. Though we are still down for the year, we have clawed back most the declines from the bottoming on March 23 ^rd.

The 200-day moving average (MA) continues to trend higher, standing at 3018 by weeks end. The S&P 500 is holding some 100 points higher than the MA confirming the uptrend is intact (particularly when it tested this support level during the prior week’s one-day steep sell off). The technicals continue to be encouraging.

Furthermore, Thursday’s job’s report reflected a slowdown in reduction of weekly claims compared to the prior week. This suggests that the pace of job growth has slowed somewhat compared to the May average, which was a positive surprise. Most of the economic data points continue to show a modest improvement over the prior data, supporting the theory that we are in the phase of economic repair, but full recovery will likely still take some time.

As we eye the end of the first half of the year and enter the slower trading volume summer months, volatility may pick up as many market professionals take some time off.

Last week there was news about the speculative retail investor supporting the rising market more than normal, evidenced by data from Robinhood (a stock trading app). The news indicated that retail investors were investing in some risky corners of the market such as airlines, cruise lines, Hertz and other companies knocking on the bankruptcy door. Only time will tell if these retail investors are as smart as they claim to be or if they will watch their paper gains evaporate and the smart money moves to bat down these economically challenged companies.

We continue to keep our eyes on the spread of COVID cases in the U.S. and around the world, but we feel that so long as the Fed continues to express its ongoing support of market liquidity, any declines ahead are likely to be temporary and can be considered a good buying opportunity.

Further ahead, we hope to hear some additional commentary of any extension of unemployment benefits, mainly the additional $600 per week that is set to expire at the end of July, a second round of PPP dollars, or an extension of the timeframe to utilize PPP assets. As of now, businesses are coming close to the end of the initial PPP timeline.

The market is setting up to encourage additional risk taking by market participants. There are still trillions of dollars on the sideline, and as quarter end reporting closes, it is possible that fund managers may need to increase their equity exposure prior to reporting for the quarter. This may very well serve as a tailwind to close out the final weeks of June and the first half of the year.

We hope the fathers, stepfathers and grandfathers out there enjoyed a wonderful day on Sunday filled with love, family and the many blessings that a family brings in life. It is family that matters most, and certainly a day to celebrate. Stay safe.

As we started the week of 6/8 with renewed optimism for both the pace of recovery and the market’s recent strength above its 200-day moving average (MA), the S&P continued its advance and closed the day breaking even for the year.

However, on Tuesday the markets started looking a little exhausted, punctuated by very low volume and ending the day near the unchanged level. On Wednesday we were closely watching the Fed’s press conference after their scheduled Tuesday and Wednesday policy meeting, which resulted in the market rolling over into the close. Thursday the market gaped lower at the open and continued its cascading decline — ultimately closing out the session with a 6% loss, the worst day since mid-March. While we were expecting the Fed to hold rates steady, we were more interested in the tone of the message, which ultimately reflected concern from Jerome Powell about the viability of a V shaped recovery and the projection of a long recovery path. We interpreted this gloomy outlook to potentially shift investor sentiment in the short-term and possibly cause the market participants recent confidence to wane.

As such, we captured a small profit from last week’s RSP trade and re-positioned the proceeds to SYP, a fund tracking the S&P 500. We were no longer confident that the market breath could be supported, particularly if there was a sentiment shift in the market. We wanted to move back to our ongoing theme of staying in larger, higher quality companies and were not willing to increase the risk in your portfolios by maintaining the position in the S&P 500 equal weight fund (RSP). This proved to be a good call as the following day the market experienced the largest single day decline since mid-March, and the fourth largest point drop on the DOW in history. We protected your account to a small degree by having made that adjustment the day prior.

On Friday, the market opened significantly higher, but the relief rally faded into negative territory mid-afternoon before a late day surge to close higher on the day. For the week the S&P was down 4.7%, bringing it back towards the 200-day MA at 3013. The NASDAQ fared better while declining 2.4% and bonds were up .75% for the week.

Recall that on 5/26 the S&P first closed above its 200-day MA, and we anticipated the market would search for near term direction around that level. In the following weeks, the market had a notable breakout above its 200-day MA and never looked back. And here we are, some three weeks later, and the market is back down to its 200-day MA level (an area that needs to hold as support to instill confidence that the direction of least resistance is still up). It is positive that Friday still closed in the black and that Thursday’s declines did not continue to a second day.

We are again at a very important inflection point, not only from a technical standpoint at that 200-day MA, but also from a sentiment standpoint, as the recent bout of increased volatility this week may very well rattle the nerves of market participants. Furthermore, there has been a notable spike in COVID transmissions in several states, namely Utah, Florida and Arizona.

While we still have a little bit of cash in the managed accounts, given the steady run up in the broad indices since March 23th, we do not anticipate our process will immediately signal reducing risk exposure, even after the 7% decline Thursday. However, should the market continue to trend downward, we stand ready to make the adjustments to reduce the risk in your portfolios, and will act swiftly if the current malaise becomes more persistent. For now, we remain hopeful that the market can support current levels around the 200-day moving average.

Last weekend as we all stared at our television and computer screens in concern and disbelief during the BLM protests and ensuing riots, it appeared that our country was quickly heading down a deep dark path of divide. How would the market react to such widespread civil unrest? What impact would widespread looting of small business in many city centers around the country have on these businesses as they just started to re-open their stores to the population?

Even in the face of the horrid violence the market decided that the recovery was still on. The 2.5 million jobs created the prior week, and continued improvement in the labor markets helped the S&P close the week up close to 5% and within a hair of turning positive year to date. The market’s ability to stay elevated above the 200-day moving average, as well as the 200-day moving average sloping upward, indicates that the trend shift from negative to positive remains well intact. Simply put, the economy is on the mend, and there is notable repair of the economic damage caused by the forced national shutdown.

Ample credit is widely available, some unemployed citizens are recognizing a higher level of personal income than when they were employed, and businesses are finally starting to re-open around the country. The economy can continue to self-repair as the enemy was not fiscal in nature, but simply a health scare that is not turning out to be as widespread and unrestrained as previously imagined.

All of this leads us to believe that as long as the current trend of a suppressed and declining transmission curve, and ongoing fiscal and monetary stimulus remain present and readily available, global economies can continue their pace toward a full recovery, perhaps even sooner than recently imagined. With this theme, it only makes sense that those areas of the market which were expected to be most damaged are likely to recover sooner that otherwise thought.

Those companies that held up well during the stay at home period (which supported technology and healthcare) may be less attractive to investors now that the market rotation is likely to continue for some time. There is now additional talk in the U.S. about another round of fiscal stimulus and an extension of unemployment benefits. The European Central Banks announced another round of stimulus on Thursday, all of which are supportive of an economy on the mend.

What if the economy gets back to full steam much faster than what had previously been predicted while additional TRILLIONS of liquidity continue to work its way through the economy? Could valuations continue to rise relative to historical levels be supported, particularly while interest rates around the globe are at or near zero? It certainly seems like the combination of massive liquidity, record low rates, renewed investor confidence of a “V” shaped recovery and an overall increase of economic activity would support these higher equity levels and valuations.

In past economic reflection points, during times of significant financial distress and dislocation, the sectors that lead in the prior expansion tend not to be the leaders coming out of a contraction. Technology was the clear leader prior to the dot com bubble, but then failed to keep up with financials in the early 2000’s. Financials and international/emerging markets, and value led the market until the great recession in 2008-2009 which, when the recession ended, technology and growth again took the lead and value, international, and emerging markets lagging over the next 10 years. We are encouraged by a potentially sustainable recovery lead by undervalued companies, including financials, leading us out of the current recession. This could ultimately prove to be a sign of a healthier economy, where areas other that big tech can support economic expansion. A broadening of market participation is a welcome change, and something that we must respond to.

As such, we have made some adjustments to our managed accounts over the past week as this theme of accelerated economic recovery takes hold and highlights areas beyond large cap growth and big tech are showing a more rapid rate of recovery.  Beta (or risk) is being bought at the expense of more stable, less volatile companies, small companies are appreciating more than large companies, and value more than growth. We cut our hedge (BTAL) in half and will likely eliminate this hedge in the days or weeks to come. We also cut in half our minimum volatility position, USMV, and re-invested the proceeds from BTAL and UMSV to a new fund, RPS, which is the S&P 500 equal weight. RSP owns the entirety of the S&P 500, but each member gets the same allocation – approximately .25% compared to the market cap weighted S&P index where the top five largest components (Apple, Amazon, Microsoft, Facebook and Google) account for some 20% of the SPY.

We are effectively broadening our scope of participation in a widespread U.S. economic recovery without significantly rotating from large to small or from growth to value. We anticipate benefiting from having more meaningful exposure to the other 495 names of the 500 largest companies in the U.S. that a cap weighted index, or a fund focused on only the largest stocks would not provide during a broad market rally. While we are not suggesting that large cap tech won’t also participate in the recovery – they likely will as a rising tide tends to elevate all ships, but having more exposure to lesser known names could potentially increase our participation in a broader rally should this trend persist.

As we open the windows and enjoy the fresh breeze that early summer brings, know that we will continue to monitor the financial markets and remain vigilant in managing the risk and rewards that the market has to offer.