April 2020

Chart of the Month

U.S. Recession Watch and Global Recession Watch Indicators

Evidence Based Investing (EBI) Perspective Advantage of the Quarter

Key points

• The rapid decline in stock values in March 2020 is called a waterfall decline. In 18 days, the decline was the fastest on record from a record high to a bear market. The left portion of the chart below illustrates just how fast and steep this decline was compared to waterfall declines in 1929 and 1987.
• In the 18 times the S&P 500 has dropped 15% or more in one quarter, it has climbed the next quarter 67% of the time by a median of 5.8%. One year later, the median gain is 17.3%.
• An historic assessment of waterfall declines and bear markets in general reveals a prevalent four-step bottoming process: 1) Oversold selling climax; 2) Rally (bounce(s)); 3) Retest (70% of the time with lower lows) but with less total volume, less downside volume, fewer stocks making new lows and fewer stocks below their moving averages) and 4) Breadth Thrusts (broad increases across stock types/classes).
• Note that the market can bounce from step 2 to 3 several times, but if several breadth thrust indicators fire bullish signals, we will seriously consider a partial or full rebalance move (increase equities back towards or to full target weight from present underweight levels).
• It is certainly possible that the sell climax low was already hit on March 23 (S&P 500 = 2213). In reviewing numerous valuation analysis and assessments by other respected analysts, when the S&P 500 bounced back up to 2600, we assessed what possible downside retests may look like. Whether it is a -5% retest (to 2470), a -10% retest (to 2340) or a dire -17% retest (to 2158 or lower),
  it is too speculative for long-term investors, in our expert opinion, to attempt short term market timing moves and potentially miss out on robust rebound days (see right side of chart below). Rather, the long-term investors focus should be to 1) weather the storm, 2) adapt/tweak where needed, 3) rebalance when/if bottoming signals (and virus containment possibilities) flash a buy and 4) don’t miss out on significant deep-discount opportunities and a robust rebound when it occurs (which can be at any time).
• Out of caution for the unknowns and the high possibility of a variety of negative news (arguably already priced in, but not for panic sellers) on several fronts, we have elected to wait to rebalance until our bottom watch indicators flash buys and, hopefully, more news about virus containment, cures and economic revival hits the news cycles. If we miss out on rebalancing due to too small/ short a window, we still participate in the recovery at a fine level. Given risk/reward dynamics and the typical profile of our clients, we believe this is the best approach at this time. Let us know if you would like to discuss or implement a different approach.

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