Market Update for the Week of May 16th, 2022
According to ClearBridge Investments, the current economic outlook bears little resemblance to the early pandemic, with consumption and business activity likely to slow from elevated levels but remain positive. Below is a summary of the most recent Recession Indicators report:
According to Jeff Schulze, CFA, Director & Investment Strategist with ClearBridge Investments:
- Worries about an economic slowdown caused two market-focused recession indicators, Commodities and Credit Spreads, to worsen from green to yellow, yet the overall Recession Risk Dashboard remains green.- Spiking oil prices have raised recessionary fears reflecting the experience of the 1973 Arab oil embargo. A review of the dashboard during that period provides a useful case study about what could turn the contraction experienced in the first quarter into a full-blow recession.- While some elements of the 1973-75 period bear resemblance to the current environment – higher fiscal spending, looser monetary policy, and positive demographics – there are several key differences. The magnitude of the current energy shock pales in comparison to 1973 and today’s economy is starting from a much stronger foundation.Current Recession Risk Dashboard
Current Recession Risk Dashboard
Source: ClearBridge Investments
1973-75 Dashboard Evolution
We are now two months into the current oil price spike. Despite some weakening, the overall dashboard signal remains green. While there are similarities to the experience of 1973, there are many more differences, the most crucial being a stronger starting economy. While further worsening in the dashboard is likely in the coming months, recent data suggests an overall red signal is not in the cards.
Moving on to the market and your portfolio, for those of you who might be wondering if or when we should be selling and going to cash, it is important to have a process that is based in facts and data, not emotion and opinion. The Nasdaq Dorsey Wright PR4050 Cash Trigger provides the facts and data we need without emotion and opinion and that is why we have been including this indicator in our weekly market updates for the majority of this year. The PR4050 seeks defense only in the weakest of market conditions by assessing the Percentile Rank of the S&P 500 Index Funds (U.S. Core) group and the Money Market (Cash) group relative to 133 other groups. The “40” is satisfied if the U.S. Core ranks in the bottom 40th percentile, whereas the “50” component is satisfied once Cash ranks in the top 50th percentile of all asset classes. This evaluation provides consistency and ease-of-use while removing emotion and opinion from the decision. Notably, this indicator was last triggered in March ’08 – five months prior to Lehman’s collapse. The indicator moved back into stocks in May ’09. It has been well over a decade since the PR4050 has triggered. Choppy periods in the U.S. stock market have followed, such as 2011, 2015/2016, Q4 of 2018, and most recently, Q1 of 2020, yet this indicator has not “head-faked” since the Great Financial Crisis. For the PR4050 indicator to trigger, Money Market must be 50% or above and U.S. Core must be 40% or below. The current reading is: Money Market = 70.42% & U.S. Equity Core = 85.92%.
Source: Nasdaq Dorsey Wright
We call this indicator the “Minimizer of Regret”. Please don’t regret your decision by selling and going to cash based on emotion and opinion. Currently, the facts and data do not tell us to sell and go to cash.
At one point or another, most of us have been told that a small number of the best market days account for the lion's share of any given year’s return. And therefore, the theory goes, investors should always be invested to avoid missing these days and the occasional sharp downturn is just a fact of life. Purveyors of this sentiment seemingly view these extreme days as unconnected events that occur in a vacuum. However, data shows that the best days often occur in close temporal proximity to the worst days and, therefore, if one were to miss the best days, one might also miss the worst days. The tables below help articulate this point.
For perspective, although this year’s decline continually brings up major reference points like March of 2020, the early 2000’s, or even the Great Financial Crisis, none of the single-day moves this year have made the top 20 tables. However, the worst daily loss this year (-4.99% on May 5th) made the top 50, as it ranked 47th on the list of worst daily declines.
So, is there any truth to the “best days” theory? If the good days and bad days are clustered together, would we be better off if we missed these whipsaws altogether? To answer these questions, Nasdaq Dorsey Wright examined a few hypothetical scenarios. The first is simply buying and holding the Nasdaq Composite (NASD) from 12/31/1985 – 5/12/2022, which would have returned 3,400%. The other three scenarios are summarized below:
Missing the Worst 20 Days: The green portfolio below applied the concept of perfect market timing and side-stepping just the 20 worst-performing days in the NASD. No doubt about it, the performance would have dramatically improved to the tune of 22,115%. Said another way, a $100,000 initial investment would have grown to over $22 million since 1985.
Missing the Best 20 Days: Taking it to the other extreme, what if you had the bad luck to miss the 20 best historical days on the Nasdaq? The red portfolio shows that missing out on the best days, but still suffering through the worst, led to an unsurprisingly poor cumulative gain of just 520% over the last 37 years.
Missing Both the Best 20 & Worst 20 Days: Realizing that these extreme days typically come near one another, Nasdaq Dorsey Wright has also shown what would happen if you were to miss both the best 20 days and the worst 20 days. Interestingly, side-stepping all 40 of these days provides a slightly better return when compared to simply buying and holding. This hypothetical portfolio would be up about 3,800%.
The moral of the story is that nobody can perfectly time the market. Unfortunately, for market timing to work, an investor must be right twice, once to get out at the top of the market and another to get back in at the bottom of the market. It’s simply not possible.
Below is the most recent DALI (Dynamic Asset Level Investing) Indicator showing Commodities maintaining their lead over Domestic Equities (U.S. stocks) and all other major asset classes.
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LPL Financial did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of LPL Financial or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
Past performance is no guarantee of future results. All investing involves risk including the loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.
Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of LPL Financial or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 5/13/22. Additional information is available on request. Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolio across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.
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