The Bear Has Not Fully Disappeared

CAMS Weekly View from the Corner – Week ending 6/12/2020

June 15, 2020

The ole bull market/bear market adage.  It has lived on in generally describing market backdrops for a long time. The problem with such subjective descriptions is when pinned down few have any real idea what fits each description.

In fitting with the evermore “marketing” of the stock market (think last 20 years plus) with the ever increasing involvement by the masses via 401K’s etc it seems the only side of this two-sided market adage coin that is thrown about is the “bull” part of the bull/bear description.

In fact, it seems what has evolved as some form of general consensus is that a market is not in “bear mode” until it goes down at least 20%.  For my part personally, the more this view has grown the more confused I have become relative to this definition.

There are so many holes in this description.  In a simple sense though, if a market is down 18% then are we all good?  Nothing to see here?

Looking at the broad stock market via the equal weighted S&P 500 Index we see in the front part of 2020 its high water mark was positive 2% and then collapsed to down 40% and as of this writing now sits at negative 11% year-to-date.  With the “only down” 11% on the scoreboard does this place us in bull market status?

With the minuscule high water mark of 2% leading to a negative 40 reading and now down 11 how about describing it this way:  We are in a primary bear market (negative market backdrop when looking at the market for the whole of this year) while in recent weeks we have been experiencing a counter-trend rally.  Counter-trend?

This is simply a trend that moves in the opposite direction of the primary trend.  In our current case the primary trend is down which means the counter-trend is up.  Historically, the concern relative to counter-trends is they usually are very notable moves and usually walk many to sleep thinking we are all good again and there is nothing to be concerned about anymore.

But The Economy is Reopening

In our current economic backdrop this can be somewhat easy to buy into.

Simply, the economy is opening back up and as near-term months unfold we will be back full-tilt.  Maybe.

Regardless, what gets lost in this simple description is the collective business backdrop (remember when owning the stock market rather than select individual companies you own the collective business backdrop) and the intricately connected supply chain is and will be operating in a disjointed fashion.  In addition, whole industries as well as individual companies are operating at less than capacity which further pressures revenues and profit levels.

This leads to less efficiency and productivity in the business environment resulting in less profitability for companies at large.  For markets, profitability is the lifeblood of upward trending stock prices.

Add to this that we came into this downturn at high levels of valuation for these collective businesses and even with the downturn remain at high levels as profits have also dropped.

Simply, lower stock prices with lower profits equals remaining high valuation levels.

High valuations are not necessarily a market killer if you will but historically high valuation market backdrops require on-going consistent growth and productivity to help them remain elevated.

All told, we remain in a bear market for the primary trend while asking if this counter-trend will remain just that – a counter-trend – or if it can overtake our current negative primary trend to the point of leading to a true bull market whereby stock prices overall are putting in higher highs on a trend basis.

This past week offered additional bear market tracks on the market landscape which calls into suspicion the near-term shelf life of this counter-trend rally.  The bottom line is if you are convinced all is good again because the economy is reopening at least be aware of the disjointed business landscape and its impact on overall productivity and profitability.

Simultaneously, and yes this is contrary to the previous sentence (welcome to our current environment eh) be cognizant of the potential for a surprise reopening that builds rapidly and said productivity concerns vanish equally as fast.  Interesting times to be certain!

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.