May 2020 Market Commentary

Does anyone recall the inverted yield curve of mid-last year and its projection that we’d enter recession sometime in mid-2020?  While we would never have expected the Coronavirus to be the trigger, it looks like we could be getting a recession right on time.  While the U.S. stock markets have had a great rebound off the March lows, the seemingly never-ending stock market rally now seems to be having some trouble.
 
Since the broad markets hit their recent low on March 23rd, we’ve seen good, continuous strength with little signs of a re-test of the lows.  Last month we said, “everyone seems to be expecting the market to re-test the lows we saw in March,” but that got us thinking, if everyone is expecting it, that might not be what’s coming soon.  The market often likes to be contrarian and frustrate the majority of investors.  We think the easy money has been made off of this bounce, and now we’re back in a choppy, in-between phase where the market is going up… kind of. 
 
So far, as of May 28th, many markets are still negative year-to-date.  The only bright spot (and positive) is the NASDAQ 100.  This has also been the one area we’ve been focused on all year, when not in cash or Treasuries trying to play it safe.  As of May 29th, the S&P 500 is down -5.29%, and the Russell 2000 (Small Cap Index) is down -15.35%, while the NASDAQ 100 is up 8.42% so far year (FastTrack data). 
 
The VIX (Volatility Index) is still relatively high for a rising market.  It is currently around 28.  To give you context, a normal bull market has a reading somewhere between 12 and 15.  If this were a normal market, the current level of 28 would suggest we’d expect some crazy volatility.  But I guess, by comparison, this is a bit more relaxed than when we saw peaks in March go up to almost 90. 
 
Our accounts are holding up very well in all this volatility, and we like to say that this is the environment that Shadowridge was built for.  We’ve been focused on the NASDAQ 100 as well as some areas of Health care and Technology.  And when the market was having its temper-tantrum sell-off, we spend much of that time either in Money Market or in U.S. Treasury bonds.  That allowed us to do some buying back into the stock market not long after the lows were hit.  What we saw was an unusual but significant shift of money flowing back in and were able to participate.
 
In this month’s chart, we’re looking at how three of the major market indexes have done year to date: The Russell 2000 Small Cap Index (IWM) in Red, the S&P 500 (SPY) in Blue, and the NASDAQ 100 (QQQ) in Green.  We think it tells the story of why we stuck with the NASDAQ over the other two during this market correction.  While being the only one positive so far this year, the NASDAQ also never saw the same drop the other two did.  You also see similar results when you compare Growth and Value investing – the Growth side has been stronger this year (not shown).

Bonds – the bond market has calmed down since it had its own temper tantrum in March.  The Aggregate Bond Index AGG is only slightly positive for May, but doing well so far this year being up just over 5% while many of the harder-hit areas (like High Yield and Muni Bonds) are still recovering, though not as fast as we would like them to.

Our Enhanced Index strategy, tracked at Theta Research, continues to rank very well nationally against other investment strategies. We believe this is primarily due to its signal to hold a Money Market fund from two days after the top in February to two days after the bottom in March.   Last week, this model did have reason to get out of the market and play it safe for a few days, but it is now back in at full strength (until we see money start to flow out again).

Congratulations to all the 2020 graduates who are finishing school in this unusual environment.  There will be stories to tell about this for a long time.  Unique opportunities await these young adults – as indeed, for all of us in this new reality.

Wishing you all the best,