We often look to the past to see what the future will bring. While we have been told over and over that the past will not repeat itself exactly, we often find people opining about the future based solely on the chart patterns of the past. We have begun to see people compare the post-COVID bear market return (blue line in the chart above) to the post-Global Financial Crisis (GFC) market return (green line in the chart above) and use that comparison to say that a market drawdown is necessary in the near future. While there is always the possibility of a drawdown in the future, it does not have to happen just because a chart says it will. If we look back at that post-GFC return, we remember that the S&P 500 drew down -15.6% in the spring and summer of 2010, but this downturn was not out of the blue. There was a precipitating event, namely the European debt crisis coupled with the May 2010 market flash crash. This is what caused the markets to draw down, not simply gravity.
It was the same thing in 2011 when the S&P fell -18.5% over the course of 5 months. There was a precipitating event in the form of the US debt downgrade. These events were short lived, and the market bounced back from them quite easily. But we can also see that after the bottom of the Tech Bubble in 2002,the market generally went up for several years (the gray line in the chart above), albeit at a slower pace than the last two crashes that we have seen. There was not an event that caused the markets to falter during that time period. We remember that for ten plus years after the GFC there were calls for the end of the bull market, and we pointed out that bull markets don’t die of old age, they are killed off by a large scale event. So when we are looking around and growing uneasy about the S&P 500 simply going up and to the right on a chart, we must remember that it most likely will not stop of its own accord. There will be an external event that causes the markets to fall. And this event may not be enough to lead to a full bear market.
In fact, we have seen challenging times around the edges of the market recently. Speculative stocks have had a very difficult time this year after performing so well last year. We can take the ARK Innovation ETF(Ticker symbol: ARKK) as a proxy for speculative stocks. We see in the chart below that ARKK fell -36.5%from top to bottom this year while the larger market (represented by the S&P 500) has been steadily moving up. As of the market close on August 20th, the S&P 500 is +19% so far this year while ARKK is down -7%.
This year we have seen ARKK move in opposition to US Treasury yields, with the speculative stock fund falling at the beginning of the year as government bond yields moved north in an effort to reestablish a normal range (see the chart below). With various Federal Reserve governors making comments recently about reducing or “tapering” the central bank’s fixed income purchases, it seems likely that rates could continue to move back up over towards the end of the year. As demand goes down, prices go down and yields go up. This could spell a difficult time for speculative stocks for the rest of the year, as some stock investors may feel comfortable parking their money in higher-yielding fixed income investments. As always we are continuing to watch events as they unfold and react accordingly.
Quote of the Week
|Afghanistan’s central bank, Da Afghanistan Bank, holds 703,005 ounces of gold, alldeposited at the Federal Reserve Bank of New York. That’s worth US $1.25 billion.It’s a safe guess that with the Taliban taking over this gold will be frozen.
An excerpt from monetary economist John Paul Koning’s breakdown of the assets held by Afghanistan’s central bank and the possible fate of those assets under Taliban control.
Past performance is no guarantee of future results. Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill. Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
There were no trades in the Fortunatus models during the week ending on August 14th, There were no trades in the Fortunatus models during the week ending on August 21st, 2021. The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
On a Lighter Note
From the whirly williwaw to the gentle zephyr, the winds of the world have always had a substantial impact on human affairs. The Greeks worshipped four major directional wind gods called the Anemoi that featured prominently in their mythology. They also had several lesser wind deities that could only be summoned after a particularly bean-heavy breakfast.
And while to the ancients the wind functioned mainly as a maritime means of motion; in present day, it has grown even more important as a source of green energy. But the wind is not just influential in the practical affairs of men. In the world of arts, the wind has often rescued creators from the doldrums of imagination. In cinema, the wind can be a movie’s awe-inspiring antagonist, but it can also be an effective device for transporting characters to their destination, whether shuttling little girls and their dogs from Kansas to the land of Oz or sending sharks across the land to snack on their next victims.
Music has had a mixed view on the wind. Some singers, like Bob Seger, are stridently anti-wind in their work with songs like Against The Wind. Others blow hot and cold on the subject, with Frank Sinatra first releasing Ill Wind in 1955 to only reconsider his initial blustery opinion with 1966’s easy breezy Summer Wind. However, only one artist was wise enough to realize that the forces of nature are neither friend nor foe, for truly we are the wind and the wind is us, and our art should try to re-connect us to this fact through powerful poetry:
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on August 13, 2021 to closing price on August 20, 2021
1 Month = closing price on July 20, 2021 to closing price on August 20, 2021
3 Month = closing price on May 20, 2021 to closing price on August 20, 2021
YTD = closing price on December 31, 2020 to closing price on August 20, 2021
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