“Everyone has a plan 'till they get punched in the mouth.” – Mike Tyson
Since the start of the year through market-close on January 26, the S&P 500 Index increased +7.6%. Then, over the next 6 trading sessions (January 30 – February 5), the index dropped –7.8%, giving back all the early year gains. Tough to swallow? Most certainly. Unexpected? No.
NorthCoast President & CEO, Dan Kraninger, wrote about it just over a month ago in the NorthCoast Quarterly Client Update… “The greatest trick the market ever pulled was convincing the world volatility didn’t exist. Consider volatility. Despite the geopolitical maelstrom in 2017, the North Korean conflict, fear of China’s economic slowdown, the stock market’s advance, and instability in South America, the stock price daily volatility of the S&P 500 Index was the lowest in a half-century. You have to go back to 1964 to find the average daily change for the market as low as it was in 2017. Further, the S&P 500 Index hasn’t closed 3% below its all-time high since the 2016 November elections. This current 14-month streak is the longest ever.”
While declines in a portfolio are never welcome, they are expected, and this recent market action is no exception. In fact, we began raising cash in our tactical equity strategies as the rally continued pushing valuations further into overbought territory. On the market-close of January 26 (recent market high), we were 81% equity invested in our U.S. tactical strategies in anticipation of a possible market decline and/or a spike in volatility. This can be seen in the referenced chart “2018 Equity Exposure”.
Market-moving indicators remain positive We still remain optimistic about the market… Macroeconomic data in the U.S. and abroad is strong | Producer and Consumer sentiment remain near highs | Long-term equity momentum is positive | The recent declines reduced P/E multiples in combination with positive Q4 corporate earnings. These are all strong market data points. A right hook to the face hurts -- but this is not our first fight. Our gloves are up and the game plan is intact. We know the recent market move is disconcerting. But it’s vital to stay disciplined. Our goal as an investment manager is to differentiate between short-term corrections (5%-15%) and the bear market risk (20%-30%). Our data indicates the former. We view this as a time to add money and take advantage of the discount the market is currently presenting. Consider some recent significant price declines… October 2014, August 2015, January 2016 and June 2016. All instances displayed quick, rapid market declines coupled with high levels of fear and uncertainty. In those occurrences, our outlook remained bullish, and the market rebounded.
The plan moving forward
- As always, allow data & discipline to drive our decision forward.
- Execute stop losses when the risk outweighs the future return potential.
- Strategically increase market exposure with stocks displaying the most attractive return/risk ratio.
- Continue to monitor the market daily and adjust accordingly.