Macro Musings April 2020
FIRST QUARTER 2020 REVIEW
- The negative score in MACROCAST™ is driven by the Technical and Aggregate Economic categories. Our indictors in the Liquidity, Inflation, and Sentiment categories remain mostly positive.
- Q1 was disastrous for almost all asset classes. US equities had one of their worst quarters ever, while Gold and US Treasuries saw positive gains.
Risk assets have seen a strong rebound to start the second quarter, but one historical study suggests that the rebound has come too far, too fast.
FIRST QUARTER ASSET CLASS REVIEW
Here is what we found most interesting about Q1 results:
- Risk assets were crushed. In one of the worst quarters in history, not a single equity sector or country saw positive returns. Remarkably, China was the best performing country down 10%. In comparison, US large caps were down 20%.
- Sector performance was unsurprising. Defensive sectors like Consumer Staples and Utilities performed the best relative to the overall market, while sectors more sensitive to economic growth, like Industrials and Financials, performed poorly. Energy stocks, devastated by the collapse in oil prices, were the worst performers, down 50%.
- Traditional defensive asset classes worked. Long-term treasury bonds have often been the best performers during bear markets, and this quarter was no different. Gold, which has a decent record in bear markets (but not perfect), also showed positive returns in Q1. However, during equity bull markets, these asset classes tend to underperform.
AFTER A BAD QUARTER, THE MARKET TENDS TO REBOUND
For only the ninth time since WWII, the stock market finished the quarter with a decline of more than 15%. Historically, the following quarters were mostly bullish, with the next six months registering positive returns every time (table from Bespoke):
As of the April 20 close, the market’s gain of 9.33% has already exceeded the median gain for the following quarter and has almost matched the median gain for the next two quarters. It is encouraging to see the market rebound so quickly after a terrible start to the year, but this study suggests most of the gains that occur following a large drop may have already been captured.
Even though MACROCAST™ is currently urging caution, we believe that the actions of the Federal Reserve and the Federal Government have taken the worst-case scenario (50%+ declines in the market) off the table.
The recent rally has led to comparisons of the current situation with the crash of 1987. Then, like now, the market crashed and fell 34% from an all-time high. The key difference between now and then is that in 1987, the crash did not cause the economy to fall into a recession. We are clearly in a recession now; the only question at this point is how long it will last.
The negative MACROCAST™ score suggests that the current rally may not be sustainable, but we will update our view if the score should improve over the coming weeks/months.
Lastly, a big thank you to all of our clients and business partners. We value the relationships and business we have with each of you and hope you and your families are safe and healthy.
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The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
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