Today broke a five day winning streak for the US markets, with the S&P 500 closing down approximately 1.12%. This recent run-up was part of a large and significant bounce off our March 11 low that equated to an approximate 11% appreciation in the index.
The market’s recent upward volatility is symptomatic of what we've seen since 2016 began. More and more we've witnessed strong upswings followed by even stronger selloffs. That being said, we've gone approximately 10 months without a new high and the rallies off both the November and February lows haven’t been enough to keep the positive market trend in place.
We recently marked our seventh year without a 20% correction, meaning the bull market that began on March 9, 2009 has become the third longest on record. During this time, the unemployment rate has fallen to 4.9% from 8.7%. The prior 12 months earnings for the S&P 500 were $43 in 2009, versus $104 today. Valuations have also increased. According to Robert Schiller, the price-to-earnings ratio (“PE”), using the preceding twelve month’s earnings, of the same index has risen from 15.7 to its current ratio of 21.8. The long-term average PE for the S&P 500 is approximately 15.6.
Based on some of the above data as well as research we acquire from one of our primary partners, we are concerned that the trend for US equities has turned negative. Basically, we see an environment where the odds of panic selling may be increasing. Having said that, it's important to note that this conclusion is nowhere near full proof – the odds of it being correct are just slightly ahead of the odds of being wrong. As you can see by this statement, we are not so arrogant as to think we can call the market with any conviction. Our tool is not a market predictor. Instead, we use it to manage potential risk arising from market conditions which have historically indicated the potential for a decline. Our positioning is based primarily on the idea that, even though increasing our cash position may cause you to miss modest gains if the barometer is wrong this time and the market continues to move up, if the system is right, it could help avoid significant financial pain and emotional distress.
This is also a perfect example of why we believe in a multi-strategy approach. While we may move to a maximum cash position in our Risk Managed strategy, we will maintain less cash in our Market Capture strategy which tends to stay almost fully invested. In fact, we are slowly shifting toward areas of weakness in Market Capture such as emerging markets, international, and commodities. These sectors have suffered serious declines over the past 12 to 18 months and may be showing early signs of bottoming. Finally, we will resist the temptation to indiscriminately sell our stock positions in our High Quality and High Income strategies.
The reason for sharing these views and trade notes is rooted in our philosophy best represented by the old saying, "All things and measure". We can’t be sure that the long-term bull market we’ve been experiencing is ready to bow out nor can we dismiss other facts. This expansion has occurred during a very slow growth period which may in part be the reason it's been able to sustain itself. That also may be the reason it hasn’t been a smooth ride. Most of this climb has been overshadowed with frequent bouts of amplified volatility brought on by renewed recession fears and geopolitical events and punctuated with common interventions by the world’s central banks. The overall return has not been that impressive either. In spite of its length, it comes in no better than the fifth best gainer among bull markets dating back to 1928.
In conclusion, many of the same uncertainties that we've been fighting for the better part of two years remain with us today. This is a factor that gives us pause. On the other hand, many sectors have already seen significant price adjustments and may present values. Accordingly, we will continue to do our best to balance these competing inputs, utilizing the weight of all the evidence to make adjustments.
As always, thank you for allowing us to work with you.
The CCA Investment Team
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.