Message from Jon
On this morning's (Monday 27th) call with Tyler, my questions were the following:
- Is there anything new over the weekend that we need to pay attention to?
- Why is this market still holding up, and in some cases, going up in the face of all the negative and dreary news that keeps pouring out of Wall Street & Washington right now?
When you examine the market conditions and movements beyond the surface layer you will find some very interesting tidbits that when linked, explain the dislocation between Wall Street and Main Street.
S&P 500 index is Cap Weighted, meaning that the larger the size of the company in terms of market cap, the more weight that company is given as a % total of the index. Apple, Google, Microsoft, and Amazon combined represent 20% of the total of the S&P 500 index at present.2 Dow Jones is a price weighted index, meaning that if you add up the current prices of the 30 companies in the index, you get its current quoted value.3 The NASDAQ is also cap weighted, but by only those stocks that are traded on the NASDAQ vs the entire publicly traded universe.
The top performing sectors to date are:1
- Consumer Cyclicals
Among the many sectors represented in the S&P 500 are IT (26%), Communications (11%), and Healthcare (16%), which combined represent over 50% of the entire index.4
So to answer the 1st question of the morning, we are seeing no material change to conditions on Wall Street that would suggest a change to our approach. In terms of lower earnings, poor economic data, and overall concerns of a V-Shaped recovery vs a U-Shaped recovery, we still believe there's enough uncertainty to make us more uncomfortable than comfortable at present. When you look at the changes on the Coronavirus front, numerous countries who have lifted their quarantine are seeing a resurgent rise in their newly infected rates to no surprise.5 So all in all, nothing really new to act on, but what we are seeing confirms our present approach in our opinion.
Answering the 2nd question requires the background clarity of the above aforementioned data as to the sectors, weightings, and sizes of companies now reported vs in 2008. Of course, you are going to see companies like Amazon and Microsoft weather this quarantine quite well since they are delivering content and supporting our IT infrastructure right now. When you remove the sectors of IT, Tech, Healthcare & consumer Cyclicals, you are back to seeing a pretty difficult and very uncertain market to invest in, in our opinion.
When we attempt to look through the numbers, we are coming up with about 2900 on the S&P 500 right now as the top end of fairly valued coupled with low trading volume, an elevated VIX and earnings season that is shaping up to be disastrous in nature, there is more uncertainty than certainty at the present, in our opinion.11,12
Does that default to the stock market crashing? Not necessarily, but it also does not rule it out either.
Am I willing yet to bet the retirement of my clients on the market conditions when the conditions are this uncertain? The answer is still NO right now. We are sticking to our approach of the low side of the S&P 500 and the time frame method as we spoke about on our webinar recently.
When I had Tyler run down the various index values, I was surprised but not shocked at what he said:
- Russel 2000 Index declined 42%, rebounded 25% putting it at -28% currently from its high6
- Mid-Cap Index declined 48%, rebounded 26% putting it at a -28% off its high7
- Russel Large Cap Val: lost 38% then rebounded 25% before resting as of Friday at -22% from its high8
- S&P 500 declined 34% and rallied 15% to come to rest at present -16% from its high9
- NASDAQ fell 28% and rebounded 28% only to come to rest at still -9% from its high10
One would look at these numbers coupled with everything else and still come to the conclusion that for the time being, we stay our course, nibble on down days and be patient, for there is still a high possibility of retesting the lows, in our opinion. It would not surprise us if the markets get happy on ANY news of a vaccine or positive testing results even if the results turn out to be ineffective.
Till we speak again, be safe out there,
Markets React to Oil Prices
WEEKLY UPDATE - APRIL 27, 2020