I hope you had a good week (certainly, a better one than the last!). Although there has been significant volatility for traders, portfolio managers are ending the week with some slight relief as the S&P 500 looks set to close +2.5% higher. By no means are we 'out of the woods’ just yet, with the likes of Goldman Sachs and JPMorgan conflicted in their advice to clients as to whether or not they should ‘buy the dip’, and the effectiveness of Central Bank intervention still under scrutiny. To sum up with a headline from a Bloomberg news article this morning, many investment professionals are confessing that “we don’t know what's going on”.
During a period of uncertainty, it becomes especially important to follow a proven investment process like ours that we teach here at the Academy. When the market is volatile and sentiment-driven, opportunities invariably present themselves to informed investors. And whilst the fundamental picture undoubtedly faces headwinds as disruption to the global economy is realised in the data, the scale and significance of this simply cannot be known at this stage with any real confidence (hence Wall Street’s admission, “we don’t know whats going on” - yet). For the time being the most prudent course of action is to revert to your process, and be willing to adapt if and when the reality changes. Currently, our Business Cycle Checklist shows a score of +3 which is indicative of expansion in the economy, and a good reason to potentially own cyclical assets.
Here the bigger picture becomes apparent. Going forward earnings estimates (grey line) will probably take a hit, but the market has already begun that pricing in with a ~10% decline in the S&P 500, and some constituents more exposed to the Coronavirus risk down considerably more from their recent all-time high (and seeing daily swings of +/-10% in some cases). Will this prove to be fully reflected in the price, or will the market need to make further adjustments? Until we see further confirmation in the data, it is merely speculation (hence the magnitude of daily swings as nobody knows with real conviction yet!).
Anecdotally, the scale of the virus and its disruption to the economy is widespread, yet it’s severity is perhaps being overestimated - certainly in terms of the death rate, on a human level. (Here I am starting to commit the same sin as other investors - offering yet another opinion with no real certainty). Rather than continuing to indulge in my personal opinions, let's take a look at the equity market Checklist as it stood coming into this month:
At +2, it still suggests that selling your favored stock positions may be premature. Whilst it is difficult to block out the noise of negative opinion and dramatic news headlines, our process is telling us to hold firm for now (until the score turns negative).
Time will tell how this all plays out, but what’s clear is that things are becoming far more complicated in markets and it has never been more important to trade with a proven process. Recognising this as professional investors, we provide our Checklists for a range of markets at the Trading Club and update them for our members on a monthly basis with video updates each week tracking the evolution in markets.
If you would like to join us for our full analysis including new insights each week or learn from the ground up with online tuition from Lex in our Million Dollar Traders online course, then join us today and take your financial knowledge to the next level right away!
Have a great weekend,
James Helliwell | Chief Investment Strategist