Green Shoots

Below are the types of conjecture I’ve been hearing and reading this week.  Generally, I look for certain phrases at market turns to help cement the idea that sentiment is hitting rock bottom (which is needed for stock market sellers to exhaust themselves).

• “Why Would Anyone Want to Own Stocks Ever Again?”
• “Buy and Hold Investing is Dead.”
• “The Price of [insert commodity] Could Go Below Zero.”

While it may seem like all hope is lost, the zombie apocalypse is upon us, and capitalism is ending, we’re here to give you a few reasons why things under the hood might be a little better than you think.  It is our job to execute on the plans we’ve laid out prior to the crisis, and while you may not be very fond of us in three weeks, I’m fairly sure you’ll recognize the value of staying calm in three years.  Here’s a little bit of what I’m seeing to suggest we may have made, or are close to making, a intermediate low.  We don’t know if it’s “the” low, but there’s reason to believe it’s “a” low.

1. Valuation – According to Ed Yardeni, of Yardeni Research, Inc., the S&P 500 forward P/E Ratio (price/earnings) is roughly 13.5 (and was close to 20 earlier this year).  By this metric, the S&P 500 is back to similar valuations we saw in 2013 (even though price is only back to where we were 15 months ago).  These valuation levels could start to attract early buyers, but the huge caveat here is that we don’t know the impact coronavirus will have on the “E” part of this equation (earnings).  We didn’t have this information back in 2008 either, and we aren’t likely to get clarity for another three weeks or so until the banks start reporting the week of April 13th.

2. Daily Range Volatility – Via Macro Charts – The 10-day average range of the S&P 500 is now at 6.5%. This means the AVERAGE day, over the last 10, has seen the S&P 500 move 6.5% from its low to its high. That puts us in the top four all-time volatility events.  By the time we reached this level of volatility in 1929, the crash has already bottomed and a 62% rally ensued. In 1987, price had bottomed as well and the S&P never looked back. In 2008, we had already passed the Oct and November bottoms, but we did see a lower price in March of 2009.  It’s always possible we have more to go, but history suggests the bulk of the move is behind us.

3. The “Fear Index” – We had the highest close ever for the VIX (measure of fear and volatility in the markets). The last time this occurred was November 2008, and the market rallied 20% over the next five trading days.  Yes, the eventual low was in March of 2009, but in some markets, including the Nasdaq 100, a new low was never reached.  While we’re not in the business of calling a bottom, I do believe that the risk/reward to the UPSIDE is significantly in our favor.

4. Insider Buying – According to AlphaSense, of companies with a market cap above $1B, there have been 1,305 filings for stock purchases so far this month, compared with just 113 during the same period last year.

It would be foolish to not reiterate that markets can ALWAYS go lower.  Please respect and remember this.  The stock and bond markets are currently broken.  There are rumors of possible bankruptcies in places where it would have been unthinkable less than a month ago.  Combined with future speculation regarding overwhelming our current healthcare system, the need for massive amounts of respirators, and younger people not heeding the social distancing warnings, it seems like a never ending perfect storm.

But it will end.   And the stock market will likely bottom before the news gets better (hint: what non-market followers will perceive as bad news may actually be taken as good news because it could reduce uncertainty).  The market hates uncertainty and we have more than our fair share at the moment.  As more information unfolds regarding the dislocation in stocks and bonds, we should start to settle down.  The market just isn’t built to trade at this fever pitch for weeks on end.

The opportunity moving forward is NOT to catch the low tick of the market.  It’s to be around for the NEXT bull market.  That’s why we prefer index and sector funds to individual stocks.  Indexes don’t go to zero…

Stay strong (and healthy) out there and we look forward to communicating on an individual basis for the rebalancing plan over the next two weeks.

– Adam