BEAR MARKET RALLIES
Update – quick summary of where our office is at
Year to date the clients in my tactically managed accounts (the growth, balanced, and conservative allocations) are roughly flat, with returns fluctuating between -2% and 1%. This is due to our rules based bull trend strategy with a stop loss on all holdings.
Our tactically managed accounts have preserved capital, compared to stock market returns that have been decimating the buy and hold strategy prevalent across America. As a result we have been bringing in a lot of new business.
Currently we are working about 60+ hours a week opening new accounts (my goal is to double assets under management this year), finishing up on a big regulatory project, and refining our watch list so that we can better positions ourselves to take advantage of volatility over the coming weeks.
Bear Market Rallies
Is the bottom in and are we set for a recovery in the U.S. and international stock markets? Likely not. In my opinion I believe that there isn’t any reason that this bear market will be unlike any of the others, in terms of volatility. I personally believe that this bear market will probably be condensed into a shorter time period, due to computerized trading and the prevalence of ETFs.
Let’s look at the past bear markets and use the broadest U.S. stock market index, the Wilshire 5000, as our proxy.
Dennis Gartman has a set of rules that he has published for investors and number 12 is “Remember, that is never just one cockroach”. A break in trend, a bear market, typically represents an exhaustion of valuations and a process by which the market clears. It clears out the excesses and problems that are ignored or those that are unknown, eventually the pressure created by tightening in the credit markets finds all of the skeletons.
Below is a chart (all charts from www.stockcharts.com) of the 1987 correction. An initial drop of about -28%, two bear market rallies of +10% with further declines as the market cleared and found a bottom. In my opinion 1987 represents a quicker recovery after a decline due to the strength of the economy at that time; the correction was largely a trading event rather than an economic shock, an unwinding of leverage, or a credit event.
Next is the 2000-2003 bear market, which is somewhat similar to today in that the U.S. stock market was largely trading at high valuations. Here we have the valuation table showing that the 2019-2020 U.S. stock market was trading at, or very close to, the highest valuations in history.
We can see that the 2000-2003 correction was a three year death march, where the air slowly came out of the stock market; a stock market that was trading at some of the highest valuations in history coming off of a ten year run of the technology stocks that represented ‘the new economy’. An eventual peak to trough drawdown of -50% was characterized by numerous bear market rallies of up to +23%.
Buying into the bear market too early can be problematic. Roughly half way through the decline a purchase can still result in significant losses, here losses of -39% and -33% are illustrated.
Finally 2008-2009, who can forget. This is where my quest began, to create a process that allows investors to mitigate principal loss through our rules based, risk management process. Here we have the same story as the other bear markets, a significant downtrend periodically interrupted by bear market rallies. Once the market breaks significantly in October of 2008 there are two sub +20% rallies. The overall loss was over -50%.
The lesson is that the initial lows are often retested, and when I say often by looking at the above charts they were retested in every one of these bear markets since 1987. Why would this bear market be any different?
DEFINITIONS
CAPE: Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10.
Price-to-Book Ratio: An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation. Book value is also the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities.
Price-to-Earnings Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Price-to-Sales Ratio: The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues. The ratio can be calculated by dividing the company’s market capitalization by its total sales or on a per-share basis by dividing the stock price by sales per share.
Q Ratio: The Tobin's Q ratio equals the market value of a company divided by its assets' replacement cost. Thus, equilibrium is when market value equals replacement cost. The Q Ratio was popularized by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs
Robert Shiller: Robert J. Shiller is Sterling Professor of Economics, Department of Economics and Cowles Foundation for Research in Economics, Yale University, and Professor of Finance and Fellow at the International Center for Finance, Yale School of Management. He received his B.A. from the University of Michigan in 1967 and his Ph.D. in economics from the Massachusetts Institute of Technology in 1972. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, statistical methods, and on public attitudes, opinions, and moral judgments regarding markets.
S&P 500 Index: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90. The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
IMPORTANT DISCLOSURES
This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein, and may be subject to change without notice. Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. This memorandum is being made available for educational purposes only and should not be used for any other purpose.
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Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty. Forward-looking statements may include assumptions relating to future investment and economic scenarios. When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statements as a result of a number of factors. Accordingly, you should be prudent with your reliance on any forward-looking information or statements.
Investing involves risks including possible loss of principal. Past performance does not guarantee future results. Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing. Wherever there is the potential for profit there is also the possibility of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources. The economic forecasts set forth in this material may not develop as predicted.
Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Investing in the index would require investors purchase an investment product, which would involve fees and expenses.
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ABOUT US
Highcroft Investment Advisors provides retirement planning, investment management, financial planning, fiduciary investment management, and lifetime income planning. Certified Financial Planner. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).
Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans. Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees. United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters. Serving Wisconsin and Minnesota. 401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.
Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual. Services include fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs. Financial advisor near me, financial planner near me, independent planner near me.