Remember last month when we said that the markets trade on “technicals”? Technicals are nothing more than patterns that form from the price movement of stocks, which has nothing to do with the company's fundamentals, like profits.
If we look at a five-year chart of the S&P 500 (below), it still looks like we are in a downward trend. However, there is also a clear “support” level (around 1850 in the S&P 500) that goes back to 2014 that the S&P is having trouble falling through, which is certainly a good thing.
Also keep in mind that we dropped to a low of 14.2% off the highs, but now we've rebounded 8.2% from those lows!
Our research suggests that these are very typical market moves and that trying to “time” the market in this kind of environment can actually lead to worse outcomes. For example, we suggested that we shouldn't reduce equity exposure as the market declined into the 10% down range. If we had sold at that time, we might have missed a few more points down, but we would have also missed the 8.2% rise, which would have been a net/net loss of value for KAM clients.
Additionally, we would probably have found ourselves in a difficult position of trying to find a time to re-enter the markets—8.2% off the highs, so at a relatively high point, and looking for a pull-back to get us back to “even” which would be several percentage points down.
As an old Wall Street adage goes: More money has been lost in the stock market by being out, than by being in.
Another good sign: Small-cap and Emerging Markets
Both of these asset classes were in “Bear Market” territory, meaning they were more than 20% off of their highs. This did trigger a reduction of exposure to these asset classes in our models. However, they have since rebounded more than 10% off of their lows and our research suggests that is a good time to re-enter those markets (see chart below).
Since small-caps and emerging markets are very highly correlated to large-caps (they tend to move together), and the large-cap stocks are well off the lows and never got near our sell trigger point of down 20%, we are cautiously optimistic for the short-term and reasonably optimistic for the longer-term.
We are not suggesting that all is clear from here on out. We most certainly will have more volatility as the Federal Reserve continue to slowly raise interest rates in an attempt to get out of the way of the markets and allow it to return to normalcy. That means these double-digit declines will be more prevalent than what we've had for the past 6-7 years, but all-in-all, that is a good sign and should be expected when investing in the stock market.
If you have any questions about the article, or would like to know more about how why we do what we do at Kruse Asset Management, then please feel free to get in touch and discuss with us.