CORRECTION TO BEAR
We have officially moved into bear territory on the S&P 500. As of market close today, the S&P 500 is down 26.74% from our February 19th high of 3386.15. A bear market is defined as decline of 20% or more. What is remarkable about this was the pace of the decline. The average number of days from peak to bear market territory is 255 days. This market moved into bear territory in just 22 days.
While at first, this may be alarming, realize the key catalyst has been the threat of the coronavirus disrupting economic activity. There have been no fundamental structural changes to the economy and, while the threat of the virus is real, it is also limited. What we mean by that is it will have a beginning and end and life and economic activity will return to normal. Already we have seen reports out of China of the number of cases declining and people returning to their normal activities.
The downward movement was further exacerbated this last weekend with the failure of OPEC to reach an agreement on oil production, and Saudi Arabia ramping up production to flood the market to in the midst of a weakening economy to pick up market share. This drove oil prices down to the low $30’s/barrel. Again, short-term this is alarming, but it is also transitory in nature. Oil prices in the $30’s /barrel are not sustainable as producers are operating at a loss at this level. This will lessen the supply of oil on the market driving up prices.
Once normalcy has returned, we anticipate oil trading closer in the range of $50-$60 per barrel.
The silver lining in this is stock valuations have moved from overvalued to undervalued with a new forward-looking price-to-earnings (PE) ratio of 13.9. This means stocks are cheap, compared with the 25-year average at forward PE of 16.3, and far cheaper than the forward PE of 19 at the peak on February 19th, 2020.
Given our discipline of requiring two up days in the market on increasing trading volume in order to confirm a reversal of the trend, we have yet to rebalance portfolios to take advantage of this decline. Our patience and discipline have paid off and our clients stand to profit long-term from this short-term decline in stock prices. When we get the proper indications from the market, we will rotate out of cash, bonds and gold positions in an effort to sell those assets at a premium, and look to buy into stocks and real estate at a discount.
This brings us to another component of our discipline which is carefully positioning assets relative to goals. Our general structure is to position assets which will be needed in the next thirty months in cash and cash equivalents, assets which will be needed in thirty to sixty months in bonds, and finally assets that will be needed beyond sixty months in equities. On are rolling 5-year basis, the S&P 500 has rendered investors a positive return 85% of the time, and on a rolling 10-year basis, investors have experienced a positive return in the S&P 500 100% of the time (has never been a negative return in the S&P 500 (Global Financial Data, Inc., 12/31/2017).
The last component of our discipline is a focus on quality. We invest in companies with strong franchises, balance sheets and free cash flows. This makes them more resilient in times like these which means they hold more value in the downturn as these companies are better able to weather the storm.
These three disciplines combined – patience, asset positioning and focus on quality - put us in a greater position to capitalize on opportunities such as the one being presented to us at this time.
If you have any questions or concerns, please don’t hesitate to connect with us at: www.boulevardwealth.com, call (877) 664-2583, or schedule with us at: https://calendly.com/blvd-ep
As always, the entire BOULEVARD team is profoundly grateful to be of service to you and sincerely appreciate the trust you have invested in us.
Not an offer to transact any securities, and not a financial planning engagement.
Advisory Services through Boulevard Wealth Management, Inc. (dba BOULEVARD), a Registered Investment Advisor. Information provided has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making financial decisions and is for informational purposes only. BOULEVARD and its representatives do not offer tax or legal advice through BOULEVARD. Please consult the appropriate advisor.