9/26/20

Good morning friends. I hope your weekend is off to a great start. The market just finished down for the fourth week in a row and is now experiencing the largest pullback since the recovery began on March 24th. Therefore, I wanted to reach out with some insight and opinions.

At the lows Thursday, the NASDAQ was down ~14% from its all-time high and the S&P was down ~10%. In my opinion, these moves are nothing more than the garden variety correction. The market typically experiences one to two pullbacks of 10% or more each year. 

On August 29th, I posted the following graphic to the RollingWave Capital Facebook page (https://www.facebook.com/rollingwavecapital). With the question “How might this impact your investments?” The market began its four week pull back two days later.

This chart could be viewed as very dire, as it may lead some to believe that we are in store for a dot com bubble like crash. However, the recent pullback has already taken the forward P/E down to 24.9 and we are rapidly approaching 3rd Q earnings. If earnings surprise to the upside (as they did last quarter) and earnings estimates for next year follow accordingly, the forward P/E will come back to a level consistent with traditional bull markets and the spike seen in August will have been nothing but a short term warning to expect a 10-15% correction.

The reasons to be optimistic are very straight forward. DON’T FIGHT THE FED. Marty Zweig is credited for creating this popular Wall Street saying in the 70’s. It’s very simple, but also very accurate. And to say the Fed is currently operating from an accommodating stance would be a massive understatement. Not only are they as accommodating as they have ever been (record low interest rates and unprecedented support to the bond market), but they have vowed to remain as such well into 2023! Could they alter course? Of course. But if anything I would expect them to under-promise and over-deliver and keep rates lower for longer.

Last week the market saw $25 billion flow out of equity mutual funds and ETF’s. This was the biggest outflow since December 2018…in which the market returned 19% the following four months. “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”― Warren Buffett

Reasons to be pessimistic? Not so clear. The election is overrated. Elections rarely prove to be inflation points for economic or market cycles. Investors expected the financial and energy sectors to be the best places to be under a Trump administration…they have been the two worst sectors since 2016. Large institutional investors have already hedged in a very aggressive way which could/should prevent any meaningful pullback due to election results.

A surge in COVID cases could hurt the market for a short time. But the market has learned, treatments have improved, and unless the economy were to shutdown again, the market doesn’t care.

The bottomline: I don’t think the market is going to rip back to all-time highs. I think we will continue to see volatility for the rest of the year. But the support of the Fed and the improving/re-opening economy should prevent any massive fallout. In my opinion, depending on an investors objectives, the recent pullback has created some incredible opportunities that should be bought, while keeping some cash/buying power available to take advantage of the ongoing volatility. 

Have an awesome weekend and let me know if you have any questions.