February 2020 Market Commentary


So much for that good start we were off to this year.  After weeks and weeks of ignoring the news of the coronavirus, apparently, a week ago someone decided it was time to sell.  And sell they did!  As of today, the last day of February, the S&P 5001 is now down YTD approx. -7.5% (FastTrack data).

Luckily for us, we started getting defensive as early as the 21st (see this month’s chart) and continued to sell to cash or bonds over the week.  Anything we do continue to hold remains strong, from a relative strength perspective, against the stock market indexes.  For example, all of our holdings in the Fidelity 403b and ORP models are currently in Utilities, Real Estate, and other lower volatility holdings have held up well relative to the S&P 500.

Last month we said “if China can’t contain the outbreak, there is a good potential for further downside movement in the market.”  Well, it would seem they weren’t able to contain it as was initially expected and now it seems to be spreading across the globe.  If a cure is found soon, we’d expect a very abrupt turn in the market and a rally back upwards.  However, there is the potential for the virus to cause enough business disruption that could knock us off the cliff and into recession.  We believe we’re currently balancing on a precipice at the moment and it could go either way.  So for now, we’ll continue to play it safe.

Earlier today, Tom McClellan posted an article about the Federal Reserve pulling back on their Repo Agreements.  To us, this makes the most sense as to why the market is actually falling this week.  Fed policy generally takes precedence over most other factors, even when the news headlines are trying to tell you differently.

This month’s chart shows the S&P 500 over the past year and I’ve noted where our “sell” signals started to trigger over the past two months.  The first signal turned out to be a short-lived dip, whereas the second one (even though at the time it didn’t appear to be that strong) was right about the suggestion for caution.  And now the S&P 500 is back into the trading range of last summer.  But with the current higher volatility, a quick rebound is more likely than it was six months ago.

One year chart of the SPY (S&P 500 ETF)2

We’ve found the Bond has been one of the few places to find shelter from the market storm, specifically US Treasury bonds.  Historically when stock market volatility increases (like we are seeing now), money tends to flow over to the bond market as a safer (relatively speaking) place to hang out and wait for the storm to pass.  As of today, the Aggregate Bond Index AGG is up year to date, when the S&P 500 is now quite negative on the year.
 
We had previously modeled out the second half of February to have higher volatility (though, nowhere near this high) and as March approaches, we are anticipating this to settle down.  It would be nice if we could start to get this ugliness behind us at that point.
 
Finally, we’re looking at doing a weekly market update similar to this in a podcast format…stay tuned!
 
Everyone stay safe and healthy out there! 

 

 

 

 

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
 
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.