It has been a couple of extraordinary weeks marked by numerous headlines and historical market moves. While we have attempted on numerous occasions to send out an update…often writing into the early hours of the morning…we wake up to find that our thoughts are being reflected in current news and dismissing the updates. One of the few consistent occurrences lately is every day we are reminded of the fact that we are blessed by extraordinary clients, extraordinary families, an extraordinary team, and live in an extraordinary country. We are reminded of everyday heroes, as we watch numerous people risk their health for the well-being of others.
As we focus on data and numbers, our comments around the coronavirus (COVID-19) may come across as cold. Please forgive us for this. We are keenly aware that these are not simply numbers. Every death is someone’s father, mother, sister, brother or close friend. Every infection is a scary moment for that individual and all the people that love them. While we work diligently to remove emotion from our decisions, it is not lost on us the losses that we as a country, state and community are facing. We take the responsibility of our decisions very seriously when it comes to the financial health of your family and know that emotions can cloud sound judgment. We constantly remind ourselves of Edwards Deming’s quote, “In God we Trust, all others bring data”. Unfortunately, in this instance, the numbers represent real people.
In our last update, we laid out several points that have now materialized. As the Senate has recently approved a $2 Trillion dollar stimulus package, and the market has seen some impressive moves higher from the March 23rd lows (we are not suggesting, at this point, that the 23rd is THE LOW), we felt it was important to mentally prepare you for what is likely still a bumpy ride. Our comments in this piece are intended to be much more technical in nature. We will be the first to admit that we are still digesting the long-term effects of a $2 trillion (or whatever the real number is) dollar stimulus package. We are leaning heavily on recent crisis (Past 20 years) to provide light on what we can possibly expect as we manage through this.
For those of you that have told us to “just get to the point”…the bottoming process takes time!
History (and markets) tend to repeat themselves:
We can study the most recent corrections to get a better understanding of what can happen during a correction in the market. The most important thing to grasp is the final bottom in the market tends to come after a couple of significant rallies, followed by significant corrections. As you will see in the past corrections, there can be three or more rallies followed by corrections before you actually find the final bottom.
Coronavirus Correction 2020
This is the correction we are currently experiencing. It started from a high of 336.36 on the SPY ETF on February 19th and at this point has dropped over 30% in just over one month. There have been two lows put in on this correction up to this point. The most recent low was put in on March 23, 2020 and we have had a couple of significant up days since that low. If the past holds true you should see additional corrections moving forward.
Global Growth Correction 4th Quarter 2018
The 2018 market started the year with higher volatility. Then the volatility quieted down and we made a pretty good run into October when the correction started. The FED was raising rates at this time, the YOY earnings growth started to slow and the US was in a trade war with China. This correction was just shy of a statistical correction which must be 20% or larger. This correction was 19.20%.
European Debt Crisis Correction 3rd Quarter 2011
This correction was just over 18% from peak to bottom. It had two significant lows and four intermediate lows during the correction. The rallies from those lows ranged from 1.79% to 14.50%. This correction was a lot shorter than the 2000 and 2008 corrections. It only took three months for the correction and four months to recover back to the peak value.
The Great Recession 2008
This was an unprecedented correction that was down over 50% from peak to bottom. There were four significant lows put in over a ten-month period. This correction was the result of institutions creating highly leveraged derivatives on mortgages and the banks were holding these derivatives. The investment was based on the assumption that you would never have a real estate correction across the entire US. Ultimately, it did happen and blew up the financial institutions. The Fed and Government had to bail out and backstop several too big to fail companies.
Dot Com Bubble Recession 2000
This correction came after an 18-year bull market and the dot com bubble. The market started to correct in August of 2000 and corrected over 45% and had five significant lows before making its final low in October 2002. This correction was a long recessionary type of correction and took a little over 2 years before the market bottomed.
Coronavirus Correction 2020
The chart below shows you the correction we are currently experiencing. It started from a high of 336.36 on the SPY ETF on February 19th and at this point has dropped over 30% in just over one month. We can see there have been two lows put in on this correction up to this point. The most recent low was put in on March 23, 2020, and we have had a couple of significant up days since that low. If the past holds true, you should see additional corrections moving forward.
This correction is different because we have never shut the economy down due to a virus epidemic. Along with that, the monetary and fiscal policy reaction has been larger and quicker than past policy reactions. We don’t know how this will actually play out, but if history is any indicator, we should see further volatility before the correction is over.
January 2020 the PE Ratio was 24.67 and the 10 Year Treasury Yield was 1.51%
There have been 3 cuts prior to the correction. August, September, and October all had 25 bps cuts. Then a final cut of 150 bps in March to take the Fed Fund Rate to 0.00%.
Global Growth Correction 4th Quarter 2018
The 2018 market started the year with higher volatility. Then the volatility quieted down and we made a pretty good run into October when the correction started. The FED was raising rates at this time, the YOY earnings growth started to slow and the US was in a trade war with China. This correction was just shy of a statistical correction which must be 20% or larger. This correction was 19.20%.
As you can see on the chart there are two major lows and two intermediate lows before this correction ended. The rallies ranged between 5% and 8% off the lows during. This correction took three months from peak to bottom and about three and half months to recover to the peak value.
Correction started October 2018 and the P/E Ratio was 21.25 and the 10 Year Treasury Yield was 2.38%
Correction ended January 2019 and the P/E Ratio was 19.60 and the 10 Year Treasury Yield was 2.70%
European Debt Crisis Correction 3rd Quarter 2011
This correction was just over 18% from peak to bottom. As you can see from the chart it had two significant lows and four intermediate lows during the correction. The rallies from those lows ranged from 1.79% to 14.50%. This correction was a lot shorter than the 2000 and 2008 corrections. It only took three months for the correction and four months to recover back to the peak value.
Correction started May 2011 and the P/E Ratio was 16.12 and the 10 Year Treasury Yield was 3.05%
Correction ended October 2011 and the P/E Ratio was 13.88 and the 10 Year Treasury Yield was 2.17%
The Great Recession 2008
This was an unprecedented correction that was down over 50% from peak to bottom. There were four significant lows put in over a ten-month period. This correction was the result of institutions creating highly leveraged derivatives on mortgages and the banks were holding these derivatives. The investment was based on the assumption that you would never have a real estate correction across the entire US. Ultimately, it did happen and blew up the financial institutions. The Fed and Government had to bail out and backstop several too big to fail companies.
During this correction, you can see that you had four major bottoms with rallies ranging from 11% to 26% after each low. With the final low not coming until approximately 10 months after the peak, it took just over two years to get back to the peak value.
Correction started September 2007 and the P/E Ratio was 19.05 and 10 Year Treasury Yield was 4.59%
Correction ended March 2009 and the P/E Ratio was 110.37 and 10 Year Treasury Yield was 2.71%
Dot Com Bubble Recession 2000
This correction came after an 18-year bull market and the dot com bubble. The market started to correct in August of 2000 and corrected over 45%. This correction was a long recessionary type of correction and took a little over 2 years before the market bottomed.
During the correction you had four significant drops followed by rallies that ranged between 11% and 21%. So, there were several times you could have thought the correction was over, but the overall trend was down and it didn’t break the trend until May of 2003. Additionally, in the Fed Fund Rate chart you can see that the Fed was cutting rates the entire time the market was going down. It took a little over four years to recover back to the peak value.
Correction started August 2000 and the P/E Ratio was 27.34 and 10 Year Treasury Yield was 5.80%
Correction ended October 2002 and the PE Ratio was 29.24 and 10 Year Treasury Yield was 3.93%
Never Lose Sight of Your Long-term Goals
Robert Greene reminds us in his The Laws of Human Nature the Law of Shortsightedness:
“It is in the animal part of your nature to be the most impressed by what you can see and hear in the present-the latest news reports and trends, the opinions and actions of the people around you, whatever seems the most dramatic. This is what makes you fall for alluring schemes that promise quick results and easy money. This is also what makes you overreact to present circumstances-becoming overly exhilarated or panicky as events turn one direction or the other. Learn to measure people by the narrowness or breadth of their vision; avoid entangling yourself with those who cannot see the consequences of their actions, who are in a continual reactive mode. They will infect you with this energy. Your eyes must be on the larger trends that govern events, on that which is not immediately visible. Never lose sight of your long-term goals.”
– Syntal Investment Team