What Happens After the Drawdown

Decreasing chart on concrete wall . Businessman walking behind graph . Economy crisis concept .

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.

Quote of the Week

The FTC’s Complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist. After all, no one who hears the title of the 2010 film “The Social Network” wonders which company it is about. Yet, whatever it may mean to the public, “monopoly power” is a term of art under federal law with a precise economic meaning: the power to profitably raise prices or exclude competition in a properly defined market. To merely allege that a defendant firm has somewhere over 60% share of an unusual, nonintuitive product market — the confines of which are only somewhat fleshed out and the players within which remain almost entirely unspecified — is not enough.

An excerpt from U.S. District Judge James Boasberg’s ruling last Monday that dismissed two monopoly lawsuits against Facebook filed by the U.S. Federal Trade Commission (FTC) and a coalition of state attorney generals.  Facebook’s stock shares surged after the decision, pushing the company’s market capitalization over $1 trillion dollars.

Market News

We have now completed half of 2021, and with that, 2020 fades in the rearview mirror. The market tumult of February and March 2020 left a scar, but few have dwelt on it as markets continue to move higher. The new year has been very calm from a stock market perspective with the S&P 500 only having drawn down -4% so far and the VIX (the “fear gauge”) falling significantly. We thought it would be interesting to look back at the performance of the markets in the subsequent year following a major drawdown event. This may help give us context to what kind of expectations we can have going forward. There have been 12 major drawdowns since 1957 so we have a good sample size.

Don’t get fooled by the simplicity of these charts. Several of these drawdowns were multiple year events, think 2000-2002 or 2008-2009 or the 1970s which just seemed to be one big drawdown. The tech crash at the start of the millennium was a 3-year affair that had many false bottoms. For instance, by 9/21/2001 the S&P 500 drew down -35.7% from its previous high, and subsequently rose +19% to end 2001. Many people got sucked back into the market during this time only to be flushed out in 2002 as the index went down -31.5% from 1/1/2002 – 10/9/2002. So as with everything, take the following stats with a grain of salt. Having seen how large the drawdowns were, it is good to look at what happened in the year after the major drawdown occurred as that is where we are right now.

As we see in the chart, the years after the bottom of the market was registered have all been good years. The average return in those years is 23%. Just as important, the average drawdown in those years is only -8.8%. One third of these years did venture into correction territory. If we remember back to 2010 when the market was down -15%, it was starting to feel pretty dicey and many people de-risked again at the wrong time. It is important to remember that just because this is the way that recent history has gone does not mean that this time won’t be different. Picking an actual bottom of the market is almost impossible, and run away fast from anybody who claims to be able to perform such wizardry. While looking at these charts may give us some understanding of how things have played out in the past, we can see that the drawdown that we have experienced has been the smallest on record. We do expect some volatility in the second half of the year as companies settle into the post-COVID world, but nothing beyond this list. Next year the vision gets murkier as it always does when looking out 12 months into the future.

As always we are keeping our eyes on the markets as they move forward, and we will make adjustments as the are needed.

Model Update

On Tuesday, June 29th, the Fortunatus ETF Opportunity models underwent their monthly relative strength rotations.  Both the Global and US Growth models added a large-cap growth fund to replace more value-oriented allocations. The Global model also acquired a holding in Latin American equities, while the US Growth model obtained a new fund in the real estate sector. 

There were no other trades in the Fortunatus models during the week ending on July 3rd, 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

With the Summer Olympics just around the corner, let’s take a quick look at how far sports science has progressed.  Of course, nowadays all experts agree that Brawndo, the Thirst Mutilator, is the best beverage for athletic endeavors because it has electrolytes. But in the past, the science wasn’t settled.

During the 1908 London Olympics, Oxo, a British purveyor of gravy and gravy-adjacent products, sponsored several athletic events. They took out ads in newspapers promoting their beefy broths as the best way to fortify competitors before, during, and after their contests.  As local runners crossed finish lines, they were approached by Oxo employees with the following gravy-focused greeting:

Huzzah, huzzah, rather good show there in the perambulation match against the Ottomans. Here, have some mutton chop juice, old chap.

Even the top foot racers of the day, stars like Bartleby Birdwhistle and Horatio Throttlebottom, were paid spokesmen for Oxo’s sporty stews. It seemed like nothing would be able to stop this profitable gravy train.

Alas, the Olympics would eliminate corporate sponsorships after 1908 (only to return again in 1984). And as the world began to move at a faster pace, people didn’t have time to wait for their sports drinks to brown and thicken, so Oxo’s lumpy liquids lost their place as the go-to beverage for athletes. Nothing was left for Oxo management but to stew in their own juices.

Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities.  EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email.  For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor.

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 June 25, 2021 to closing price on July 2, 2021

 1 Month = closing price on June 2, 2021 to closing price on July 2, 2021

 3 Month = closing price on April 1, 2021 to closing price on July 2, 2021

 YTD = closing price on December 31, 2020 to closing price on July 2, 2021

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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