When we see falling asset prices we can become emotional. Looking back at lines on a chart, we tend to forget the emotions that surrounded those previous falling lines. We forget that those lines did not fall in a vacuum. There are real emotions, headlines, stressors, and dangers that abound at every moment in time that inform history. But these are all too often removed when we look at a simple price chart of a line moving up and down.
History is always predictable, but it is only predictable because we now know the outcomes. When we actually look at what is happening on the ground in the lead up to cataclysmic events and events that turnout to be trivial, there is almost never consensus on where the world is heading. We are a complex species made up of 7+ billion independent actors that turn the future into history by passing it through the present.
And so we are here, in a new moment with inflation running hot, oil prices spiking, and a major war in the world. And as of Friday, the S&P 500 was -8.9% year-to-date and -9.5% from all time highs on a total return basis. Does this time feel different? Does it feel different than COVID, the tariff trouble and interest rate tightening of 2018, oil’s fall in 2015-16, US debt downgrading in 2011, the European Debt Crisis in 2010, the Global Financial Crisis in 2008, or the popping of the Tech Bubble in 2000-02? We would argue that it is impossible to remember what we felt like during those times since they have resolved themselves at this point. We know the course of history, and the line has always resolved itself in a favorable direction here in the US.
We are not making predictions about where the markets will go from here. To do such would be foolish. We do not know the minds of all of the market participants. Even if we knew how global events will shake out that does not mean that the stock market will react the way we think it should in response to those events. We have made a plan for how to deal with eventualities in the market as they actually happen, in a non-predictive manner, and we are executing on that plan.
So where are we in the market? Some charts follow comparing the recent performance of the S&P 500following the COVID bear market to the performance of the S&P 500 following other recent bear markets: the Global Financial Crisis (GFC) of 2008 and the Tech Bubble in 2000-02. We veered into correction territory this past week with the S&P 500 turning down past -10% and then bouncing back up – see the blueline in the “S&P 500 Draw Downs Post Bear Market” chart:
We are back to pre-COVID valuations. As evidence, see the chart below that tracks the price-to-earnings (PE) ratio over the next twelve months (NTM) for the S&P 500. Those pre-COVID valuations were not considered cheap, but they were livable.
Looking back at the post-2002 bear market, there was a continual push of the stock market higher from early2004 (when its PE NTM = 18) through 2007 while forward looking multiples like PE continued to fall.
We have seen many -10%+ drawdowns since the Global Financial Crisis of 2008. All of them resolved to the upside very quickly. We do not know where the market goes from here, but this is not uncharted territory.
Performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. 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.
The Global Opportunity model underwent its monthly relative strength rotation on Monday, February 28th.The model reduced its equity exposure and added a defensive position in a gold-focused fund.
During last week, both the Emerging Growth Companies and Equity Dividend models re-balanced some over-extended positions in their portfolios and slightly increased their allocations to cash.
There were no other trades in the EWM Investment Solutions models during the week ending on March 5th,2022. The emerging markets equity sector moved into a long-term unfavorable trend by the market close on Friday, March 4th. All remaining major equity market sectors maintain a long-term favorable trend, and the Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.
Quote of the Week
“Mr. President, we and you ought not now to pull on the ends of the rope in which you have tied the knot of war, because the more the two of us pull, the tighter that knot will be tied. And a moment may come when that knot will be tied so tight that even he who tied it will not have the strength to untie it, and then it will be necessary to cut that knot, and what that would mean is not for me to explain to you, because you yourself understand perfectly of what terrible forces our countries dispose.“
Nikita Krushchev, former First Secretary of the Communist Party of the Soviet Union, writing to John F. Kennedy during the Cuban missile crisis in 1962 imploring for cooler heads to prevail and lead us away from war.
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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 February 18, 2022 to closing price on February 25, 2022
1 Month = closing price on January 25, 2022 to closing price on February 25, 2022
3 Month = closing price on November 24, 2021 to closing price on February 25, 2022
YTD = closing price on December 31, 2021 to closing price on February 25, 2022
All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.
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