Four Questions This Market MUST Answer
The market has come under severe selling pressure, and nothing has told us that more than the price action since last Thursday, when stocks began to plummet on a combination of hawkish “Fed speak” and global growth concerns.
Now, in early Wednesday trading, markets have rebounded a bit, but that isn’t much consolation for the bulls, as stocks in the Nasdaq Composite now are officially in bear market territory (i.e., more than 20% below their most recent highs).
So, what is it going to take for stocks to begin a marked improvement from here?
To answer that question, the market needs to answer four key questions. And fortunately, my “secret market insider” and I took on these four key questions in today’s issue of the Eagle Eye Opener.
In fact, subscribers to this daily market briefing already knew about these four questions before the market opened today, so they had a head start on what the pros are focusing on.
Today, as a courtesy, and as a self-admitted attempt to bring you on board as a subscriber to Eagle Eye Opener, I am putting in an excerpt from today’s critical issue. So, here we go…
Four Questions for the Selloff: Why Have Stocks Dropped to the March Lows? What’s Holding Up Best? What Makes This Stop? How Bad Can It Get?
Yesterday, the Nasdaq closed at fresh year-to-date (YTD) lows and the S&P 500 closed essentially on YTD lows, as the selling over the last several trading days has been intense. Given this steep decline and the fact that the S&P 500 is teetering on important support, I wanted to step back and clearly explain: 1) Why have stocks dropped so sharply in less than a week? 2) What’s holding up best through this rout? 3) What makes this stop? 4) How bad could it get?
Why Have Stocks Dropped to YTD Lows? The S&P 500 has declined 7% in just five trading days. If there is a singular reason “why,” it is rising worries about a global recession. Notably, it’s not coming from the United States or the Fed. The outlook for Fed policy hasn’t changed nearly as much as the drop in stocks would imply.
Instead, it’s coming from overseas. China is doubling down on its hopeless “Zero COVID-19” policy, whereby it shuts down huge cities and essentially causes economic “brownouts” to stop the spread of COVID-19. And since that’s a futile strategy that won’t work, markets are concerned this will go on in perpetuity. Meanwhile, these temporary economic shutdowns are more than offsetting the stimulus from Reserve Ratio cuts (and all other stimulus). Bottom line, if the Chinese economy plunges into recession, it’s bad for every major economy, including the United States.
Meanwhile, as we stated when Russia first invaded Ukraine, the longer this dragged on, the worse it would be for economic growth — especially in Europe, because it would turbo charge commodity prices and other inflation. Well, we are two months into the war, and there are no signs it’s ending anytime soon, and more signs it could spread beyond Ukraine into Moldova. The growth headwinds from this war are raising the chances of a recession in Europe and the United Kingdom. If that happens, it’ll be bad for every major economy (including the United States).
Bottom line, what’s changed since Thursday, April 21, is that worries about a global recession have surged given 1) Concerns about China’s growth and 2) the Russia/Ukraine war isn’t ending anytime soon and may actually spread. That’s the main reason the S&P 500 is down so sharply.
What’s Been Working? Since last Wednesday (when the breakdown occurred), all 11 sector SPDRs are lower, but the defensive sectors have relatively outperformed. Consumer Staples (XLP) and Utilities (XLU) are down 2% and 4%, respectively, while Real Estate (XLRE) and Healthcare (XLV) are down 5% each. More broadly, minimum-volatility ETFs (SPLV) and value (VTV) also are relatively outperforming, down 4.5% each, and this mirrors what’s outperformed the entire YTD. Since growth worries are at the core of this pullback (and at the core of YTD volatility) we continue to expect these ETFs to relatively outperform and view them as a safe place to “hide” amidst increased volatility.
What Makes It Stop? The core concern is a looming global slowdown, so we have to get news that reduces that concern. Specifically, that means 1) China reversing its “Zero COVID-19” policy or COVID-19 subsiding so there are no more lockdown threats. 2) Russia and Ukraine declaring a ceasefire or truce. 3) The Fed backing off its hawkish rhetoric.
Unfortunately, none of those events are likely in the near term, and until some of them at least partially occur, it’ll be tough for stocks to mount a real rally. Regarding earnings, yes, they can help if they are great, but the cause of this current air pocket is macro-growth concerns, and good earnings won’t erase those.
How Bad Could It Get? In the April Market Multiple Table, we put a “Gets Worse If” target of 3,763, based on a 17X-18X multiple of current year earnings. Interestingly, that’s also around the level where most analysts think the “Fed Put” would reappear.
We continue to think that’s an appropriate level to look for material support. That’s another 10.3% from current levels, which would put the S&P 500 close to -20% YTD.
Should We Raise Cash? There’s no doubt that the prospects for a global slowdown are being driven higher by China’s COVID-19 policies and the ongoing Russia/Ukraine war. And in that respect, downside risks are rising.
That said, the macroeconomic environment hasn’t deteriorated 7% in four trading days, so we view this drop as overdone given actual fundamentals. Selling when markets overreact to fundamentals isn’t a historically good strategy, so we will hold on here and take the pain. At these levels, the S&P 500 is trading at 18.5X this year’s earnings and around 17X 2023 earnings. And given corporate commentary and earnings that are pretty solid, those valuations are generally fair.
Now, I wouldn’t say we’re bullish, but we don’t think this recent drop is representative of current fundamentals, and if our goal is to raise cash, we’d prefer to do it more in the middle of the 4,170-4,600-trading range, and not here.
If you want to get access to this kind of unique market analysis every trading day, directly to your inbox at 8 a.m. Eastern, then I invite you to check out my Eagle Eye Opener right now. There’s no time like the present to gain more market insight.
ETF Talk: Enjoy Big Rewards with Low Risk Through This Fund
The Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) tracks a dividend-yield-weighted index that is comprised of the least volatile, highest-dividend-yielding stocks in the S&P 500.
SPHD cherry-picks the U.S. equity market, rather than delivering the whole basket. It includes the 50 least volatile names chosen from a shortlist of the S&P 500’s 75 highest-dividend-yielding securities. The fund then weights selected stocks based on trailing 12-month dividend yield, with sector weights capped at 25%.
Looking a little like the broad large-cap market, SPHD tilts small and tends to overweight traditionally defensive industries such as utilities and basic materials. The fund might also underweight the more volatile technology and consumer cyclical companies. The index is rebalanced semi-annually.
The fund has amassed $3.7 billion in assets under management and has a 0.02% average spread. Its expense ratio is 0.30%, meaning it is relatively inexpensive to hold in relation to other exchange-traded funds, and it has a solid 3.23% dividend yield.
Chart Courtesy of StockCharts.com
Invesco S&P 500 High Dividend Low Volatility ETF has an MSCI ESG Fund Rating of AA based on a score of 8.39 out of 10. The MSCI ESG Fund Rating measures the resiliency of portfolios to long-term risks and opportunities arising from environmental, social and governance factors.
ESG Fund Ratings range from best (AAA) to worst (CCC). Highly rated funds consist of companies that tend to show strong and/or improving management of financially relevant environmental, social and governance issues. These companies may be more resilient to disruptions arising from ESG events.
I urge all interested investors to exercise their own due diligence in deciding whether this fund fits their own individual portfolio goals.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
In case you missed it…
How to Be the Lead Mare
I’m a horseman, and I own several of these gorgeous creatures along with a small ranch in Southern California. I love my animals, and I take pride in learning about myself from one of the best teachers on Earth — the horse.
You see, the horse is a herd animal, and one that has evolved over hundreds of thousands of years to thrive in its group social structure. The horse also is an animal that requires leadership, as the highest-ranking mares (and sometimes the stallions) in the herd are leaders, directing the movement of the group to different grazing areas or water sources.
In “natural horsemanship” of the kind I practice, the horseman is tasked with taking the “lead mare” role. In doing so, the horseman must provide the leadership to his/her beloved animals that they require to survive and flourish.
This method works well, provided the horseman has the requisite confidence in his/her knowledge and skills, and provided he/she has accepted the responsibility of assuming the lead mare role. Confidence here is perhaps the most important ingredient, but confidence only comes after you’ve done the hard work to acquire the knowledge and skill necessary to assume that confident lead-mare swagger.
Have you ever noticed that truly confident people walk with their heads up? Think about that for a moment. Have you ever known a confident person who is always looking down? The answer is almost certainly no, and the reason why is because confident people don’t look down. They look up, and they take on life as the lead mare.
That lead mare role is one that I assume not only with my horses, but also with my approach to investing, and to helping readers of this publication, as well as subscribers of my newsletter advisory services.
After more than two decades in this industry, I know I have built up the requisite knowledge and skills needed to be the lead mare when it comes to helping investors grow and protect their money.
Your editor assuming the role of lead mare.
That’s why you’ll always get the sense from me through my writing and my speaking events, and if you ever meet me in person, that I am the type of person who never looks down when I walk. So, if you want to be the “lead mare” of your life, cultivate the confidence to take on the responsibilities and obligations reality requires of you, and step up to the task with the fortitude, intelligence and love required to live a beautiful existence as the best human you can be — a human that helps others celebrate the very best within us all.
And if you want to live a profoundly meaningful life, and I assume that if you’re reading this you do, then think about the world with the following mental scaffolding. There’s an old saying in the literary world that I’m fond of telling everyone that I can, and it is that a man’s life is incomplete until he has tasted love, poverty and war.
Beginning with the latter, my closest brush came in January 1991. I was just graduating from the U.S. Army Airborne School at Ft. Benning, Georgia, as the bombs began raining down on Saddam Hussein’s Iraq. As it turned out, that conflict was so short-lived that I missed out on the war leg of the complete life.
As for poverty, well, although I come from a modest middle-class American family, I would hardly say that qualifies as poverty by global standards. And aside from some lean post-college days working at the financial newspaper Investor’s Business Daily, I would also have to say that poverty has mostly eluded me.
Now, when it comes to love, I think this is where I’ve more than made up for any deficit in the other two complete life components.
Love of family, friends, career, music, literature, philosophy, nature, fitness, sport, combat and perhaps most of all, love of learning and educating are the animating forces at the core of my being. That love runs particularly deep when talking about the love I have for helping investors better understand — and better profit from — the financial markets.
In fact, you might say that this love is a form of war on poverty itself… the poverty of knowledge that keeps investors paralyzed into subpar performance. Ironically, my love for this pursuit also encompasses my own desire to be a complete man, engaging in a war to help others overcome their own conception of poverty — and in the process taking on the role of the lead mare that we all need to embrace.
So, be the lead mare — and be the very best human you can. The world needs it, and you need it.
Energy and Mind
“The energy of the mind is the essence of life.”
The greatest of all philosophers held a special place in his mind for mankind, and he revered us as the “rational animal.” Here, he tells us that the “energy of the mind,” which also could be defined as “determination,” “grit,” “focus,” and/or a host of other positive modern words, is what makes us, us. Think about that for a moment and you will realize that all you are, and all you’ve done in life, has come from the energy of your mind. And the more energy you can apply to good things, the more good you can do for yourself and the world.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,