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Hear from Chief Investment Officer Jesse Mackey in this week's Market Perspective.
I’m Jesse Mackey, CIO of 4Thought Financial Group, and this is 4Thought’s Market Perspective as of October 5th, 2021.
Yesterday the S&P 500 Index closed 5.4% below the most recent record intraday price from September 2nd, with a maximum intraday drawdown of 5.87% so far. Across all asset types, US small cap stocks are now the best performer year-to-date, while emerging markets stocks show the worst performance. Despite their recent lull, most stock types (with exception of emerging markets) continue to outperform bonds by a wide margin so far this year.
Historical data indicates that once a new Bull Market has been confirmed (which happened on August 18th of last year when the S&P 500 Index had recovered from its March 23rd, 2020 Bear Market low point and achieved a new record price), the longest time period on record (since 1950) before the beginning of another Bear Market was 7.44 years, with an average of 2.44 years. Only 1.13 years have elapsed from the point of Bull confirmation in this instance so far.
There has usually been at least one 10%+ correction (but often several) between most bear markets in history. The average time between the end of one correction (or bear market) and the start of another is a little over 1 year. The first correction in the current Bull Market was completed almost just over one year ago on September 24th, 2020. We like to refer to the combination of a correction and its corresponding recovery (which was registered on November 9th of last year) as a Wolf Market.
Our data set also tells us that about 55% percent of Wolf Markets like the last one we experienced have been followed by a period that exhibits trailing 1-year returns of 30% or greater without a 10%+ correction (something we refer to as an Eagle Market). The first Eagle Market subset of the current Bull Market was quantitatively confirmed on March 1st, and has continued since then. Since the November 9th Wolf Market endpoint when the previous record price was breached, the S&P 500 Index had experienced additional gains of about 17.95% as of the close of business yesterday. Once an Eagle Market like the current one has been indicated, it continues for an average of an additional 5.35 months. This instance has so far continued for 7.27 months, so it's above the average duration so far. Eagles may be followed by any of the three other market types, including a flattening of growth rates to return to a standard Bull Market, or an immediate reversion into a Wolf or Bear market. Given that stocks may still be relatively early in the (traditionally defined) Bull portion of the market cycle (by historical standards), an immediate Bear market (although certainly possible) appears the least likely of the various scenarios, while a 10%+ correction is becoming increasingly likely in the short to intermediate term.
Based on analysis of the complete historical market type data set using our Multi-Method Adaptive algorithmic process, we are now allowing overweight allocations to Opportunistic Investing, neutral allocations to Strategic Asset Allocation and Liability-Driven Investing, and underweights to Selective/Concentrated Investing.
From a probabilistic analysis perspective, valuations tell a story that's somewhat negative for stocks, and more favorable for the bond markets. On this basis, most stock types range from slightly to moderately overvalued. Bonds range from moderately undervalued (in the case of long term US Treasury bonds) to near fair value (in the case of emerging markets bonds and Treasury Inflation Protected Securities). Long term US Treasury bonds now reflect the most attractive pricing relative to the alternatives, while US mid and small cap stocks are the least attractive.
Against this backdrop the outlook for stocks is now slightly negative in the short to intermediate term based on the overall aggregate of our historical market-type data analysis and quantitative probabilistic analysis.
I hope this was helpful. If you have questions or you’d like to discuss what this means for your particular situation, please contact 4Thought at 516-300-1617 or at firstname.lastname@example.org – and don’t forget to subscribe to our blog feed and our YouTube channel. Thanks for watching, and see you next week.
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