Covenant Weekly Market Synopsis for February 9, 2018

February 12, 2018

It was a volatile week both in terms of stock prices (S&P 500: Mon. -4.1%, Tues. +1.74%, Wed. -0.5%, Thur. -3.8%, Fri. +1.49%), and specifically for the VIX Index which experienced its largest move ever on Monday afternoon jumping 115% (a lot of that move occurred in the last 30 minutes of trading).   The intraday equity market swings were something to behold as well.  Reminded me of the saying about Texas weather, “if you don’t like the weather now, wait 15 minutes” as markets swung between positive and negative performance multiple times many days of last week. On Thursday, the S&P 500 closed 10% below its record high, making the market move an official “correction”. By the time the bell rang to close the markets on Friday afternoon, the losses on red days clearly overmatched the gains on green days pushing most global equity indices into negative territory for the year. Picking through the rubble, Chinese equities stood out declining 10.1% for the week and most global equity indices declined by 5% or more. Bonds didn’t offer much help either, with yields rising in all but the shortest maturity issues. Gold fell 1.3% and the price of WTI Crude declined 9.5% on the week ($59.20 per barrel).

For more detail on weekly, month-to-date and year-to-date asset class performance, please click here.

A View from the Edge (of the abyss) – Declines of 10% in the market are normal, but the “feel” of this one is magnified because it comes after a year of historically low volatility. The chart below shows almost 40 years of data, illustrating that steep intra-year declines are normal and do not always result in negative equity market performance. In the chart, the red lines represent the largest peak-to-trough intra-year declines.

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Source: Dimensional Fund Advisors

It’s also worth noting that on Friday afternoon, the S&P 500 bounced strongly off its 200 moving day average.  That is generally a good technical sign, but probabilities are on the side of equities even if the bounce proves to be short-lived and stocks fall further.  There have been 16 drawdowns of 10%+ since 1976, and only five occurred around a recession.  During the other 11 non-recession corrections, the S&P 500 declined by 15% – implying this market move may not yet be done.  Trying to time the bottom isn’t worth it.  Indeed, there is no reason to try and pick the exact bottom as research from Goldman Sachs indicates an investor who bought the S&P 500 10% below its peak without waiting for a bottom would have experienced positive 3-,6- and 12-month returns in 75% of corrections. It would be hard to make the case that equities are a screaming buy, but it is worth noting that the combination of tax-related earnings upgrades and the stock sell-off have pushed the forward P/E multiple for the S&P 500 from approximately 20 in mid-January, to 16.5 today. This is not a recommendation to buy stocks – this perspective is offered in the context of advising investors to stick to their asset allocation plan.

Economic Data Update – While the investors struggle to figure out the correct price for securities, the US economy continues to show signs of strength. The ISM non-manufacturing index hit 59.9 in January, its highest reading in nearly 15 years.

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Source: Institute for Supply Management and FTN Financial

Combined with tax reform, deregulation and a newfound vigor in international economies, 2018 should be an above average year for the US economy (a topic we discuss in our Q1 Economic Review and Outlook).

Be well,

Jp.