4Thought provides you with actionable investment analysis and perspective on the financial markets.
Contact us to determine whether any ideas presented are applicable to your situation before taking any actions with regards to your financial plan or investment portfolio.
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 February 9th, 2021.
Most stock types are outperforming bonds so far in 2021. US small/mid cap and emerging markets stocks in particular have strongly surged past their US large cap counterparts this year, in an upset of the dominant trend of the last several years.
Back on November 9th of 2020, the S&P 500 Index of US large cap stocks had fully recovered from its September 10.55% downward correction, and had achieved a new record price. It has notched additional gains of about 7.39% since then, as of the close of business yesterday, about of half of which occurred just in the last week. We like to refer to the combination of a correction and its corresponding recovery (like the one recently experienced) as a Wolf Market. Prior to this, the rapid recovery from the 2020 Bear Market low point on March 23rd (at which point the S&P 500 had dropped more than 34% from its previous peak) met our technical definition of a new Bull Market.
Historical data indicates that once a new Bull Market has been confirmed (which happened on August 18th), the shortest time period on record (since 1950) before the beginning of another Bear Market was approximately 4.4 months, and the longest time on record was approximately 10.7 years, with the average coming in at about 3.2 years. Approximately 5.83 months have elapsed from the point of Bull confirmation in this instance so far. We also note that 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 about 4.6 months ago. Historical data further tells us that about 55% percent of Wolf Markets like the one we recently experienced have been followed by a period that exhibits trailing 1-year returns of 30% or greater (something we refer to as an Eagle Market). For much of the remaining 45% percent of the time we return to a plain old bull market. There are a limited number of historical instances of more negative immediate outcomes, but the periods immediately following a recovery from a correction have historically been mostly positive for stocks in the short to intermediate term.
However, valuations from a probabilistic analysis perspective tell a story that's not nearly as positive. On this basis, stock types range from near fair value (such as with international developed markets stocks) to moderately overvalued (in the case of large cap growth stocks). Bond types also range from near fair value (in the case of emerging markets bonds) to slightly overvalued (in the case of Treasury Inflation Protected Securities). Against this backdrop the outlook for stocks is now neutral in the intermediate term based on the overall aggregate of our historical market-type data analysis and quantitative probabilistic analysis.
US small cap stocks are the best performers so far in 2021, while US aggregate bonds show the worst year-to-date performance. Emerging markets bonds now reflect the most attractive pricing relative to the alternatives, while US large cap growth and tech stocks are the least attractive. With regards to allocations amongst investment methods, we are now allowing overweight allocations to Selective/Concentrated Investing, neutral allocations to Strategic Asset Allocation, and underweights to Liability-Driven Investing and Opportunistic Investing.
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 email@example.com – and don’t forget to subscribe to our blog feed and our YouTube channel. Thanks for watching, and see you next week.