If you own a smartphone in 2021 then you probably know that the stock market began having a tough time since the beginning of September. I have most of my notifications muted, not to drown out the news but to drown out the panic. What I've learned is that the little headline notifications I receive on my phone usually cause me more anxiety than they do benefit me with information to act upon. I allow myself to be more calculated by silencing the noise and spending my mental capital researching facts. Here are some facts:
S & P 500 is up roughly 15.5% YTD
S & P 500 is down roughly 4.3% from its all-time high
If you're saying to yourself 'well that does't sound too bad' then you may be wondering, why all of the doom and gloom headlines?
One thing we've learned over the last decade of actively trading the markets is that price movements are acting quicker to news and economic shifts. Not only quicker, but in most cases more drastically. Take for example the past two market corrections in December of 2018 and March of 2020. Both of these periods of market turmoil met the definition of correction, meaning they were 20% or more down from the highs. The interesting thing is how quickly we recovered from them. In 2018 it took 4 months to return to highs, while in 2020 during the Covid pandemic it only took 5 months to recover from a 37% loss. Compare these recoveries to 2011 (7 months) and 2008 (4 years). I believe the reason for more dynamic markets is the accessibility of them. Retail investors, whether it is through an app on their phone or their ability to trade through a large financial institution, can make portfolio shifts more rapidly than we've ever seen in history. Just look at what a few million Reddit users can do to highly shorted stocks in 2020!
Because markets are evolving towards a more dynamic state, we have to be fast to act. Technical indicators will breakout, breakdown, or reverse within days notice but usually these momentum indicators are tied to their less volatile brother economic indicators.
Let's take a look at some economic indicators we've been monitoring:
(Recessions are marked by a grey area on the chart)
Recently you've heard about the Federal Reserve contemplating raising interest rates. Last week the Fed signaled their likelihood of rate hikes for the next several years with the consensus being that in 2023 and 2024 we'd have numerous rate hikes taking the Target Fed Funds rate back towards 1%. The markets didn't react in a major way to this news last week, but have been reacting more this week due to the US Debt ceiling deadline coupled with Treasury rates drifting higher. One key indicator (we've covered in previous blogs) is the 10 year to 2 year Treasury rate spread. When this spread inverts (meaning the rate on the 2 year goes above the 10 year) the US stock market has corrected consistently over the past 50 years. This isn't to say that the inverted yield curse causes recessions but that it is simply correlated with them. Ironic as it may seem, in August of 2019 the 10 to 2 spread inverted for only a few HOURS...and then the covid-19 correction began 6-7 months later. But when looking at this chart closely you can see that usually a yield curve inversion lasts longer than a few hours before a recession takes place months or years later.
We pair these indicators with market technicals to position our portfolios quickly when we see 'flashing yellow lights'. One trend that we recently broke was the 50 day moving average on the S & P 500. Notice in this chart that we held the average perfectly dating back to February of 2021. Now that this trend is broken, we are looking for markets to begin building a base or finding solid foundation.
We believe that pullbacks similar to what we've experienced beginning in September are all part of the process, and mostly healthy! You've heard the old saying 'two steps forward and one step backward'. In this case we've seen the market take several steps forward since March of 2020. Given the level of gains since then, economic indicators oscillating around key levels, and the recent trend break in the market we have taken a cautious tone in the short run. In fact, in the majority of our portfolios we have already taken our foot off the pedal generating cash to protect against volatility.
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Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.