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Hear from Chief Investment Officer Jesse Mackey in our most recent Multi-Method Investing® Market Perspective.
VIDEO TRANSCRIPT:
I’m Jesse Mackey, CIO of 4Thought Financial Group, and this is 4Thought’s Multi-Method Investing® Market Perspective as of December 12th, 2023.
On December 8th, the S&P 500 Index completed its first "Wolf Market" (one that began on July 27th) during what appears to be a larger recovery from a Bear Market that likely ended on October 13th, 2022. We define a Wolf Market as a period including a 10%+ correction (but less than 20%), plus the recovery back to the pre-correction peak price. Following this movement, the S&P 500 is currently near the highest peak in the recovery from the Bear Market first registered in May of 2022, although it is still short of the all-time record peak from early January 2022. US large cap stocks are the best performing publicly traded broad asset type so far in 2023, while US Treasury Inflation Protected Securities are the worst.
On October 13th, 2022 the S&P 500 (Price Return) Index reached the current maximum intraday draw-down of 27.5% from its January 4th, 2022 peak price. After a partial recovery in the time since then, the index sat 4.07% below the record as of the close of business yesterday, after having just recovered from its first 10%+ technical correction during this time period. Both the initial indication of a Bear market on May 20th, 2022 (based on the technical intraday definition of a 20%+ decline), and the recently concluded Wolf Market registered on December 8th, have very significant implications for portfolio management strategy.
The history of the S&P 500 Index since 1950 reveals that once Bear markets have been identified (in which a 20%+ decline from a record peak has occurred), they have continued for an average of an additional 4.61 months and have experienced an average additional cumulative loss of 16.56% until the trough is reached (for a total cumulative drawdown of 33.2%). Six out of thirteen instances of a Bear turned around within 1 month after it was indicated (some as early as the same day), while all others lasted longer (up to a maximum of 1.63 years). As of the date of the deepest trough measured so far (on 10/13/22), 4.87 months had elapsed since Bear market indication, and 1.56 years have elapsed as of today (both measures longer than average). For long term investors that can afford to wait until a recovering upturn in the broader market cycle (which most likely already began in October of last year based on historical data), this calls for aggressive deployment of cash and cash equivalents into stocks (and bonds in this case).
In addition, the periods immediately following Wolf Markets have historically been very favorable for stocks. Historical data shows that approximately 55% percent of Wolf Markets are immediately followed by an Eagle Market (a period that includes trailing 1-year returns of 30% or greater without any intervening 10%+ corrections), and the vast majority of the remaining 45% are followed by a resumption of a traditional Bull Market (which is also favorable). Furthermore, the first Wolf Market experienced after the trough of a Bear Market tends to have the most favorable aftermath, which appears to be the current scenario based on historical data. Long term investors should now consider an immediate deployment of 100% of any idle cash (not needed for short term liquidity or expected upcoming spending). There is no need to wait for further declines, or to use a dollar cost averaging program for idle cash. This should be discussed with your advisor to confirm appropriateness for your situation before taking action.
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 Strategic Asset Allocation and Selective/Concentrated Investing, and underweights to Liability-Driven Investing and Opportunistic Investing.
From a probabilistic analysis perspective, stocks of most types range from near fair value to moderately overvalued, while bonds of most types range from slightly undervalued to near fair value. Long term US Treasury Bonds now reflect the most attractive pricing relative to the alternatives, while US growth stocks are the least attractive.
Against this backdrop the outlook for stocks in general is now significantly positive over the 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 info@4tfg.com – and don’t forget to subscribe to our blog feed and our YouTube channel. Thanks for watching, and see you next time.
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