By Pete Biebel, Senior Vice PresidentPrint This Post
Thank you for taking a few minutes to read this week’s article. Amid the horrors of the Covid-19 crisis, the day-to-day swings in the stock market are a mere sideshow. Our entire country is suffering, and things will get worse before they get better. We still have no idea of how bad things might get, how long before the number of infected citizens declines, how many people will die, how long until the many unemployed can go back to work, or how many businesses will not survive the contagion. So, we hunker down and watch and wait and hope for signs of improvement.
For my part, I’ll continue to try to offer some help in assessing the market’s current state and its likely future path. I’ll also try to provide some helpful thoughts on market strategy… suggestions that you can discuss with your advisor regarding adjustments that might be appropriate in the current circumstance. Hence, this week’s title.
This week’s title is taken from a chapter title in a book by David Sklansky, titled “Sklansky on Poker.” It’s one of more than a dozen books that he has written or co-authored on poker, blackjack and gambling in general. In the chapter, Mr. Sklansky writes, “Basically, there are only two kinds of errors that can be made in a poker hand:
- An error that costs you one or more bets.
- An error that costs you the pot.
Error No. 2 nearly always is much worse than error No. 1.”
Though there may be some themes in common with short-term speculation, I’m not going to tell you that playing poker is an analogy for long-term investing. But the concept that some errors are worse than others seems especially apropos to the hand we’ve been dealt recently.
We’re all going to make one of two errors in retrospect, and to varying degrees. Months from now we’ll know whether we held on to too many positions and took too much risk or we cashed-out of too many positions when we should have been taking advantage of bargains. Only time will tell. But, depending on your age, liquidity needs and general financial health, which of those two errors is worse can make all the difference.
Investors who are retired or nearing retirement can’t afford a big mistake. They can’t afford an error that will “cost them the pot.” If they hold on to too much equity exposure now and the market declines another 15% to 25%, it could be a life-altering error. The priority should be to make a reasonable effort to preserve capital so that they’re in a better position to reinvest those funds when the smoke clears.
Conversely, almost everyone who is in their late-40s or younger, employed and financially stable should be thankful for the bargain prices and should probably be more aggressive now than at anytime in recent years. That doesn’t mean to throw every cent at the market today. And it doesn’t mean that they can ignore the risk discipline that they’ve established for the stocks and funds they own. But it does mean that, for example, they should consider increasing the periodic contributions to their 401Ks. This market pullback, where ever it ends, is likely to be one of the best buying opportunities in a generation. By dollar-cost-averaging new funds into the market over the coming months, you young whippersnappers may lose a bet or two, but you will almost assuredly win the pot in the end.
Last week the averages all gave back a bit of the prior week’s rebound. The NASDAQ Composite Index (COMP) slipped about 1 ¾% while the S&P 500 Index (SPX) lost a little over 2%. The Dow Jones Industrial Average (DJIA), hampered by large losses in a few of its 30 component stocks, fell by about 2 ¾%. There were two stark reminders of the recent tendency for larger, well-capitalized companies to outperform smaller company stocks: First, the even-weighted S&P 500 Index (SPXEW) fell by more than twice as much as the capitalization-weighted SPX. Second, the Russell 2000 Index of small-cap stocks (RUT) lost almost 7% for the week. For the reasons cited over the past couple weeks, we should expect that small-cap stocks will likely continue to underperform.
The high on SPX last week was just over 2641, slightly higher than the previous week’s peak, but still right in the range of the first rebound objective I detailed last week. I wrote that the first rebound target would be in the 2640 – 2660 area of SPX. That level represents both a typical retracement percentage and SPX’s 200-week moving average. SPX stalled at the bottom end of that range four times in the past seven trading sessions. When the averages slumped in the second half of last week, it introduced the possibility that the rebound phase may already be complete.
I continue to believe that, if SPX can rally beyond that band, then the 2800 level would become the next rebound target area. But after last week’s failure, I’d make that only about a 20% probability. The balance of that probability seems to be about evenly split between churning sideways for the next six to eight days or breaking lower and threatening a test of the March low near 2200. If SPX can hold above about the 2420 level, it can keep alive the potential for another run at breaking above that 2640 – 2660 range. Dropping below 2420 would be a sign of trouble and dropping below about 2360 would signal that a trip to the March lows or lower was likely in the cards.
For investors who are nevertheless tempted to up the ante now, my suggestion would be to look for bargains among the Consumer Staple stocks. Rather than try to make a hero call by buying stocks in the airline, cruise ship or hotel industries, I prefer to go with companies that are far less likely to face significant reductions in revenue for an in determinable length of time. Producers of basic clothing, food and other necessities of life are more likely to be able to sustain a reasonable income stream even while to overall economy contracts.
Stocks in the Healthcare sector also seem like reasonable candidates but be careful. It seems that everyday some little biotech company announces a breakthrough and their stock rips higher. The risk in these situations is that, by the time the little company can get its test or vaccine approved, several other companies may have discovered a better test or vaccine.
Sunday evening, as I hunker in my bunker and plunk away at my keyboard, I see that the U.S. stock index futures are up by about 3%, so, at least the week seems to be beginning with a strong hand. A 3% gain would lift SPX to just above last week’s high and to just above the upper end of the 2640 – 2660 band. Economic data this week is not likely to do much to sweeten the kitty. The FOMC meeting minutes on Wednesday could provide some insight on the Fed’s state of mind, but it will be old news.
|Tuesday 4/7/2020||JOLTS Job Openings|
|Wednesday 4/8/2020||FOMC Meeting Minutes|
|Thursday 4/9/2020||Producer Price Index, Final Demand, M/M||-0.6%||-0.3%|
|PPI ex Food & Energy, M/M||-0.3%||0.0%|
|Initial Jobless Claims||6,648K||5,000K|
|Friday 4/10/2020||Consumer Price Index, M/M||+0.1%||-0.3%|
|CPI ex-Food & Energy, M/M||+0.2%||+0.1%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.