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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 March 30th, 2021.
Most stock types are outperforming bonds by a significant margin so far in 2021. US small and mid cap stocks have also strongly surged past their US large cap and non-US stock counterparts this year.
Back on November 9th of 2020, the S&P 500 Index had fully recovered from its September 10.55% downward correction, and had achieved a new record price. It has accumulated additional gains of about 8.92% since then, as of the close of business yesterday. Prior to this, the rapid recovery from the 2020 Bear Market low point on March 23rd, 2020 met our technical definition of a new Bull Market. It has now been just over one year since this Bull Market began.
Historical data indicates that once a new Bull Market has been confirmed (which happened on August 18th, 2020 when the index had recovered and achieved a new record price), the shortest time period on record (since 1950) before the beginning of another Bear Market was only 6 days, and the longest time on record was approximately 7.44 years, with the average coming in at about 2.44 years. Approximately 7.47 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 6.23 months ago on September 24th. We like to refer to the combination of a correction and its corresponding recovery 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 (something we refer to as an Eagle Market). The first Eagle Market subset of the current Bull Market was recently quantitatively confirmed on March 1st, and has continued since then. Once an Eagle Market has been indicated, its continuation is generally relatively short-lived, lasting an average of an additional 5.35 months (but they sometimes end as quickly as the same day they are confirmed). Eagles may be followed by any of the three other market types, included a flattening of growth rates to return to a standard Bull Market, or an immediate reversion into a Wolf or Bear market. However, given that stocks are still early in the traditional broader Bull/Bear market cycle (by historical standards), an immediate Bear market (although certainly possible) is the least likely of the various scenarios.
However, from a probabilistic analysis perspective, valuations tell a story that's far more negative for stocks, and favorable for only some pockets of the bond markets. On this basis, virtually all stock types are registering as either significantly or highly overvalued. Bond types range from moderately undervalued (in the case of long term US Treasury bonds) to moderately overvalued (in the case of emerging markets bonds). Against this backdrop the outlook for stocks is now neutral to negative 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 by far the best performers so far in 2021, while US aggregate bonds show the worst year-to-date performance. Long term US Treasury bonds now reflect the most attractive pricing relative to the alternatives, while US small and mid cap stocks are the least attractive. With regards to allocations amongst investment methods, 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.
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.