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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 9th, 2021.
Most stock types are outperforming bonds so far in 2021. US small and mid cap stocks in particular have strongly surged past their large cap counterparts this year, in an upset of the dominant trend of the last several years. In addition, a little over a week ago we confirmed an Eagle Market in the S&P 500 Index of US large cap stocks (more on this to come later).
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 4.81% 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 (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.
Based on a new intraday price analysis study we recently conducted, historical data indicates that once a new Bull Market has been confirmed (which happened on August 18th, 2020), 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 6.77 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 5.53 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 quantitatively confirmed on March 1st. Once an Eagle Market has been indicated, its continuation is generally relatively short-lived, and 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 so 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.
From a probabilistic analysis perspective, valuations tell a story that's not particularly positive for stocks, but is beginning to tilt more towards bonds. On this basis, stock types range from moderately overvalued (such as with international developed markets stocks) to significantly overvalued (in the case of US small cap stocks). Bond types range from moderately undervalued (in the case of long term US Treasury bonds) to near fair value (in the case of Treasury Inflation Protected Securities). Against this backdrop the outlook for stocks is now neutral to slightly 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 cap stocks are the least attractive. With regards to allocations amongst investment methods, we are now allowing overweight allocations to Strategic Asset Allocation and Opportunistic Investing, neutral allocations to 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.