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Hear from Chief Investment Officer Jesse Mackey in this week's Quant Market Perspective.
I’m Jesse Mackey, CIO of 4Thought Financial Group, and this is 4Thought’s Quant Market Perspective as of May 17th, 2022.
Last Thursday, on May 12th, the S&P 500 (Price Return) Index reached a new maximum intraday draw-down of 19.92% from its January 4th peak price (just narrowly avoiding bear market territory), having first confirmed a 10%+ technical correction on January 24th. It has since rebounded somewhat to sit 16.82% below the record as of the close of business yesterday. Emerging markets stocks are now the worst performing publicly traded broad asset type so far this year, while US Short Term Bonds have been the best (despite their own negative returns).
More broadly, historical data indicates that once a new Bull Market has been confirmed (which happened on August 18th of 2020 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 1.75 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 first correction in the current Bull Market was completed on September 24th, 2020, and what may be the second (if it doesn't cross the 20% decline threshold into a bear market) was initially confirmed as of January 24th, as mentioned earlier. We refer to the combination of a correction and its corresponding recovery (which was last registered on November 9th, 2020) as a Wolf Market.
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, 2021 and ended on January 4th of this year. Eagles may be followed by any of the other three market types, including a flattening of growth rates to return to a standard Bull Market (which is not the case in this instance), 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 very possible at this stage) still appears the less likely of the two remaining scenarios. It is therefore more likely that the correction that was first registered on January 24th will remain only a correction of 10-20% before the resumption of the broader traditional Bull Market, and is still less likely to cross the threshold into a full-blown Bear Market drop of 20% or greater, despite Thursday's near-miss.
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 moderately positive for most stock types, but even more favorable for most bond types. On this basis, most stock types are now slightly to moderately undervalued. Bonds range from significantly undervalued (in the case of investment grade corporate bonds) to moderately undervalued (in the case of Treasury Inflation Protected Securities). Investment grade corporate bonds now reflect the most attractive pricing relative to the alternatives, while US large cap stocks are the least attractive.
Against this backdrop the outlook for stocks is now positive in 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 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.
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