Market Update

The S&P 500 dropped 2.1%, to 2488.65 last week. Volatility dropped as did the correlation between stocks, both good signs. S&P 500 stocks setting new 52-week lows totaled 182 on Friday versus only two new 52-week highs. The index peaked at 2641.39 on Tuesday, just shy of the 32.8% Fibonacci retracement level at 2651. The market spent four trading days struggling to advance before profit-taking set in on Wednesday. It’s possible we’ll see another challenge of the 38.2% retracement. It’s likely the challenge will fail as traders lock in profits from the bounce off the 2191 low on 23 March.

It’s very unlikely the lows are in for the bear market. Since the Great Depression, on average, 83% of the prior bull markets’ gains were given back in the subsequent bear stretch, according to David Rosenberg of Rosenberg Research (Rosenberg was Chief Economist and Strategist at Gluskin Sheff. He was also chief North American economist at Bank of America Merrill Lynch. He ranked first in economics in the Brendan Wood International survey for Canada seven years in a row).

Rosenberg writes that “the median retracement in 10 market cycles going back to the 1928-29 peak was 69%. Based on the average retracement, the S&P 500 cycle low would be 1135, while the median would be 1515, compared with Friday’s close of 2488.65.” The average post-WWII retracement is 71% with a median of 54%, according to Rosenberg (S&P 500 at 1455 and 1798 respectively). There’s a 20% chance the lows are in, “but it’s more likely that the bottom to be picked is somewhere between 1500 and 1800 on the S&P 500,” Rosenberg concludes. We threw out the 1300 level as a likely worst-case scenario a few weeks ago. We think the stock market is probably heading lower in the coming months.

Economic Update

The household survey showed a 2,987,000 drop in employment. The survey is done the calendar week that includes the 12th day of the month; the week of March 8-14. In the household, survey workers are classified as employed, unemployed, or not in the labor force based on answers to a series of questions about their activities during the survey reference week.

Three million is a huge number. It’s going to get much bigger given that the household survey references a week in the first half of March. Many businesses didn’t begin laying off workers in earnest until the third week in March. Unemployment forecasts are running as high as 20% with unemployment levels above 12% for at least the next year. There are estimates that unemployment right now is above 13%, higher than at any point since the Great Depression. The Labor Department reported Thursday that approximately 9 million people have filed for unemployment insurance during the last two weeks; 6.6 million last week alone filed for unemployment benefits. Goldman Sachs is forecasting a Q2 GDP contraction of 34%, much worse than its 24% forecast previously.

The 2020/2021? recession is likely to be much deeper and more protracted than many economists initially forecast.

Bear market investing - stick to what you know

Bear markets bring out the stupid in people. Some sell everything at the bottom and then wait years to get back in, missing much of the next bull market. Others load up on stocks prematurely because buying the dips was a winning strategy during the prior bull market. Still others decide to bet the ranch on a single stock that they just know is going to be a winner.

The best thing to do is stick to your process. Don’t suddenly start doing things differently. A buy and hold investor should continue to be a buy and hold investor through the entire market cycle. A value investor should continue to look for good companies on sale, preferably paying a nice dividend. Now isn’t the time to learn theme-based investing. A growth investor shouldn’t suddenly become a value investor or a momentum investor, or a day trader. Stick to what you know. Keep your process consistent and your investing results will be just fine over the entire market cycle.

Regards,

Christopher R Norwood, CFA

Chief Market Strategist