Stanton Group Health & Wealth Update Thursday, March 26, 2020
Stanton Group Health & Wealth Update Friday, March 20, 2020
By John Stanton
As noted in our last update, the coronavirus was the trigger for the market sell off. As pointed out in our update of Feb 28th, there were already more serious problems Wall Street, and the Economy were facing.
The decline this past week ending March 20th, put the correction into a bear market (-20% or greater) in a record 19 trading days. So far YTD, the S&P 500 is down 29%.
The degree of overvaluation and investor confidence was extreme, to say the least. Both institutional and individual investors alike believed that the Fed would, and could, do everything, and anything, to prevent a bear market, and/or recession. This vanished in a selling avalanche, which is unprecedented in its intensity, and breadth.
In this update, I will take you through the few danger flags that emerged, an examination of our current positioning, and the outlook on how a market bottom could develop.
A Little Market History
As recently as December and January, the Headlines were anything but gloomy.
Don’t look now, but Goldman Sachs is saying the economy is nearly recession-proof. CNBC, 12/31/19
Wealthy investors see nothing that will stop this relentless bull market. CNBC, 1/19/20
Founder of world’s largest hedge fund says, ‘Cash is Trash’ as the Dow soars to records. Marketwatch, 1/25/2020
By the end of February, Wall Street experienced 3 out of 4 market days in which declining stocks outnumbered advancing stocks by an 8:1 margin.
Size of Bear Markets
Measured by percent decline from market peak, to market bottom, the average decline has been -33.5% (Not Including the Bear Market of 1929) So far, we have just about hit the average. The last Bear Market that began in 2007 was down -56%, from peak, to bottom.
Many of the most severe bear markets were preceded by excessive debt levels and valuations- conditions that are clearly present in today’s stock market.
Bear Market Duration
Even though this market decline has almost reached the average decline of all bear markets, the age of this one is barely 1 month old. Bear market durations have averaged 1.3 years in length.
Since 1987 (my starting year in the investment business), duration of bear markets has ranged as short as 5 months (1987 and 1990), and as long as 2.6 years (2000).
The economic disruptions resulting from the Coronavirus, is hard to calculate at this time. Many corporations have been reducing their revenue and earnings forecasts. The resulting loss of confidence in consumers, business owners, and investors alike, all contribute to the uncertainty in the current environment.
I don’t believe this will become one of the largest bear markets in history, but, based on a number of concerns I still have, it is most likely that this bear market still has more downside risk ahead.
Danger Signs were Apparent, but were Rare
Margin debt is one of the warning signs that has been flashing for the past two years. This indicator has continued to show an elevated level of risk, indicating that the “smart money” were not buying into the S&P 500 rally.
Last September a composite index of Brokerage Stocks failed to provide confirmation of new highs. This tool often peaks months, or even a year or more before a final major market top.
These two indicators, along with valuation concerns, and slowing revenue growth of publicly traded companies, kept our stock portfolios defensive, with a cash hedge.
Concerns that Keep Me Awake at Night
The difference in yield between the 10 year Treasury bond and the 3 month Treasury bill
When this turns negative, it typically warns of a recession on the horizon. This happened early in 2019. With the Federal Reserve’s aggressive easing of interest rates in 2019, most analysts chose to ignore this message. The stock market responded, and continued its upward rise, with several minor corrections along the way, without a corresponding increase company’s revenue and profits.
While the negative yield curve may provide a warning of slowing economic conditions, it is the uninverting of this indicator that provides final confirmation of an imminent recession.
This “uninverting” has now begun in full force, signaling that the U.S. will be headed into its first recession in over a decade.
Valuation: From extremely expensive, to only very expensive
As of last December, the S&P 500 trailing 4 quarter P/E ratio of 23.8 was 38% above its 92 year average.
The Buffet Indicator, named after the famed value investor Warren Buffet, is unique as it captures whether or not there is a disconnect between stock prices and economic fundamentals.
Despite the recent 30% drop in stock prices, valuations remain elevated , based on current earnings that have not even been revised down.
Stock prices would need to fall an additional 35%, for the Buffett Indicator to reach its 68 year average.
Debt (Credit Risk)
Another major concern of a prolonged recessionary scenario would be a corporate credit default cycle.
One troubling observation I have had is that the Federal Reserve’s policy of keeping interest rates too low for too long, has led to bloated balance sheets of a large number of publicly traded companies, and has encouraged borrowing for buybacks and dividends.
When an unforeseen event hits, (i.e. the Coronavirus), and the resulting economic fallout occurs, many of these companies are exposed.
Leverage works both ways, can increase your returns when times are good, become a burden when times are challenging.
Going forward, companies with strong, transparent balance sheets, borrowing money for expansion, capital investment, and/or strategic acquisitions that improve market position, is what helps guide our strategy in our stock portfolios.
The Market Crash, and Bear Market from 1987: Important Lessons from the Past
As noted earlier, the current market decline in such a short amount of time has few time periods to compare. The 1987 decline is one time that may be most like today.
The bear market came about quickly, after the S&P 500 declined 20% in just 38 days, from the top on August 25, 1987.
The two indicators flashing warnings were distribution, and negative leadership, a week before the October 19th meltdown.
Negative leadership is particularly telling. It means that investors are anxious to sell stocks, regardless if their position is at a loss, or stock market is going lower. The more negative the number, it suggests that investors will use short term rallies to get out.
During our recent sell off, these indicators have pegged to the most negative extreme, and continue to stay there.
The Market Bottom will take Time to Develop
There are often dramatic rallies on the way down to a final bottom that can lead to bear market traps. As market losses deepen, it is important to remember that headlines are the gloomiest near the stock market bottom.
The path ahead for this bear market is very unclear at this point. There are two problems to address, one a health threat that results in a possibility of a large portion of the population becoming ill, some seriously, and two a slowing economy that is made worse by efforts to stem the spread of the Coronavirus.
Current Positioning
We have been increasingly defensively positioned, because of the growing risks described above, prior to the Coronavirus becoming the event that pricked the stock market bubble.
The good news is that the best buying opportunity in over a decade lies ahead! Our indicators have not yet fallen into a potential buy signal territory. My best estimate is maybe by May. I will be providing an update to our clients if changes are warranted.
With a substantial cash reserve, our model portfolios are well positioned to take advantage of the next low-risk buying opportunity, when it appears.
Stimulus and the Corona Virus
It is my view that the resulting stimulus and monetary packages should have some positive effect to stabilize confidence, and limit the layoffs, or at least minimize the pain. In addition, as our country, and the world, move through this health challenge, recovery should begin.
On the health front, this is going to take some time to get through. The positives are that I have seen a few stories about people in the U.S. who have been diagnose with the Coronavirus, been treated, and have recovered. Treatment varies depending on their physician, from a physician’s visit, with doctors’ orders for recovering at home, to hospitalization for a small percentage of people infected.
Of the interviews, and stories I have seen, all have said it was not a pleasant experience, with descriptions that it is the worst they have ever felt, feel like they have been hit by a truck, etc.
Of course, I do not want to minimize what is occurring. This new virus is easily spread, and hits the most vulnerable especially hard. In addition, I understand the concerns coming from the medical profession, that if a large portion of the population contracts this pathogen, then even if the percentage of those contracting it needing hospitalization, ICU treatment, including ventilators is small, the absolute numbers could be large, overwhelming our hospital capacity.
Let’s take Italy as an example. Italy has a population of around 60 million. Here are the numbers I have seen so far:
As of March 22
Number of Cases Confirmed: 63,927
Number of Cases Requiring Hospitalization: 20% to 50%, 13,000 to 32,000
(Depending on source. Data very hard to come by, even by WHO. (World Health Organization)
Number of Cases Requiring ICU/ Ventilator: 10% of Those Infected 6,392
Number of Deaths 6,077
Total number of Hospital Beds in the Country: 190,000
Total number of ICU Beds: 8,100
Total number of Ventilators: Could not find a number.
The confirmed cases were half the above number as of March 16th. So the spread is extremely fast, if measures such as quarantine, social distancing, and hygiene are not implemented.
In addition, there are concentrated areas of infection, particularly in Northern Italy. Doctors, nurses, and other staff become quickly stretched. And to add to the problem, they contract the virus, and are unable to work, putting further strain on the system.
So, numbers for equipment needed, personnel, and hospital beds go up quickly.
I get it, that this virus, transmits quickly, and for 10% of those who contract, can have quite severe consequences. Staying at home, applying good hygiene, social distancing, and essentially using good old fashion common sense, will limit the spread of this virus, and slow the spread.
The Center for Disease Control has always worried about the flu virus. Each season, the scientists try to get ahead of what they conclude through their analysis will be the strain of flu that comes our way. Its serious business. Here are the preliminary estimates from the CDC, in the United States:
Flu Illnesses 38 million to 54 million
Flu Medical Visits 17 million to 25 million
Flu Hospitalizations 390 thousand to 710 thousand
Flu Deaths 23 thousand to 59 thousand
From physicians and medical scientists I trust, prevention by getting the annual flu shot is a good idea. These same physicians and scientists also believe that doing the best you can to build a strong immune system, regardless of age, will give you the best shot of getting through contracting the flu virus, with minimal downtime, and complications.
So far in the U.S, here are the Stats for Coronavirus through March 25th, from the CDC, updated daily, Monday through Friday
Confirmed Cases 54 thousand
Total Deaths 737
Hospitalizations Could not find on CDC
Requiring ICU Could not find on CDC
What I would Like to See
I, as all of you, have been watching multiple news sources covering the crisis. Being a numbers guy, I love to see the detailed numbers behind the statements.
Seeing only the number of confirmed cases, and then deaths, is limiting the data.
Presenting the number of confirmed cases, the number hospitalized, the number that required ICU, and deaths, would be better to allow us to gauge, plan, and implement solutions.
This crisis is also exposing a number of flaws in our global supply chain. Gary Shilling, a very smart, practical man, recently wrote an article detailing his outlook on Globalization, and Free Trade.
I have to say, I agree with much, but not all, of his analysis, and conclusions. It is an interesting read, and should prompt questions on how we as country are going to handle this issue going forward, after getting through the coronavirus.
I will be writing more about this in future posts.
Personal Perspective
Many of you know that my 89 year old father has been in a nursing home after suffering a third stroke last year.
I am very grateful for where he resides. The care, environment, and staff could not be better. They decided 3 weeks ago to have a no visitor’s policy, to protect the residents.
Not being able to visit has been hard on him, and our family. As a face to face visit alternative, the staff helps set up facetime calls on an IPad with the residents. Our family did this with Dad for the first time last week. He was fascinated by this, as he never had this experience before.
So, we adapt, and try new things.
Here is a pic from my last visit with him.
Our country has always risen to challenges throughout our history. And, we will do it again with this one, coming through it stronger personally, and as a country.
Hope everyone can enjoy the time at home with family, and stay healthy and safe!
Please let me know if you have any questions, and/or comments, on this post.
John
.John Stanton is the Wealth Advisor at The Stanton Group WP | Seacrest Wealth Management, LLC. With more than three decades of experience in the financial services industry, he serves as an advisor for clients, focusing on financial planning and the investment strategies to support their financial plan. Based in Naperville, Illinois, John serves clients in Naperville, Plainfield, Darien, and throughout the state. Learn more about John’s services by visiting www.stantongwp.com or connecting with him on LinkedIn. You may reach John Stanton at 630-445-2380 or email JStanton@seacrestwm.com.
The Stanton Group WP provides investment advisory services through Seacrest Wealth Management, LLC (the “SWM”), and a registered investment advisor. SWM is a registered investment advisor (“RIA”) with the U.S. Securities and Exchange Commission located in the State of New York. Seacrest Wealth Management, LLC can be reached at (914) 502-1900.
Certain assumptions may have been made in the preparation of this material as at this date, and are subject to change without notice. This is not an investment recommendation or a solicitation to become an investor in a pooled fund and/or a separate account managed by the Firm. Unless indicated, these views are the author's and may differ from those of the firm or others in the firm. We do not represent this is accurate or complete and we may not update this. Past performance is not indicative of future returns.
