At one point in early April the S&P 500 was down a bit more than 10% in two days. Terms like “the stock market” and “the S&P 500” get thrown around so often we forget what they mean. Just what is the S&P 500? An index tracking the performance of the stock prices of the 500 largest publicly traded companies in the US. The media often speaks of stocks as though they are casino chips. They are portrayed as if they have no intrinsic value and are bought and sold by wild speculators in some abstract gambling parlor. But stocks have intrinsic value. They are shares of ownership of real companies. Companies with real cash flows and (hopefully) real profits.
We must retrain our brains. They aren’t stocks. They’re companies. The stock market isn’t an ethereal casino. It is the place where people buy and sell shares of real businesses. Businesses doing millions, billions, and sometimes hundreds of billions of real annual revenue.
This brings us to an interesting question.
If the stock market was down over 10% in two days in April, did the real value of the 500 largest, most profitable and best financed companies in the greatest country in the world really decline by a tenth in 48 hours? I suspect most people – even amidst the market bloodbath – would have answered with a resounding no. But they were acting as though the answer was yes, as the flight from equities – the redemption of ownership of these titans of industry – precipitated the sell off. If you think of stocks as gambling tokens, a 10% decline in two days makes sense. When you think of them as ownership shares of the most successful companies in the world, a 10% decline on some headlines seems asinine.
So what does one do when the market suddenly feels like a casino and investors are running around with their hair on fire? You surely have heard from Rory and I we steadfastly refuse to forecast what’s around the corner in the markets. Amid the early April madness, we couldn’t have told you how the month would end up. But... When the speculators in the market – those who treat stocks as gambling chips rather than ownership shares of excellent companies – hand us a gift we humbly accept and say thank you. At one point in April while the S&P 500 was down 10%, international stocks were positive for the year, which presented a wonderful opportunity to sell a portion of our international holdings and use the proceeds to buy more ownership of domestic companies, particularly those in the tech sector that were hit the hardest during the early April drawdown. Sell high, buy low. Again to the speculators we say thank you.
As of this writing, the S&P 500 is up nearly 20% from the April lows and only down ~3% from its all-time high in February. Whether it continues to break new highs or retests the April lows is unknowable and – to all long-term investors operating with a plan – irrelevant. Another downturn may occur, and we will happily be standing by to take advantage if it does. We’ll note the index has already clawed back more than 50% of its decline – in every previous instance this occurred it was a sign the bottom was already in save for 2022 (I remember during that bear market a few years ago when commentators trumpeted the index’s 50% retracement in August as this had historically been a perfect indicator the downturn was finished, only to watch it sink to new lows in October – a reminder that no indicator is perfect and the future is always unknowable).
In the context of the above admonition regarding indicators, we will hesitantly offer you one more. We caution against relying too heavily on data like this, as again the short-term gyrations of the market cannot be forecast. The legendary Wall Street trader Marty Zweig identified the “Zweig Breadth Thrust” – a rather rare event in the markets that has historically portended exceptionally strong short and long-term returns. It is a market sentiment indicator measuring how quickly sentiment shifts by dividing the 10-day moving average of the number of stocks advancing by the total number of stocks. A Zweig Breadth Thrust is triggered when it moves from below 40% to above 61.5% over a ten-day period. Here is the history of post-war Zweig Breadth Thrusts – note the average returns following such triggers delineated at the bottom of the table:
On a 12-month basis, forward returns are about 2.5x higher following a Zweig Breadth Thrust as they are all other years with a 100% win rate compared to a 73.8% average win rate. As with any other indicator, we recommend against relying on this for any trading strategy. But it portends well for the next 12 months. Again, no guarantees.
April was eventful. While we didn’t quite hit the technical definition of a bear market (down 20% from a recent high – the lowest we got on a closing basis was -18.75%), the old line from JP Morgan (the man himself, not the eponymous firm) feels relevant:
“In a bear market, stocks return to their rightful owners.”
To all our clients who held on or even increased their ownership of some of the most successful companies in America over the last month – count yourself a rightful owner of some of the greatest companies in the world.
Sean Cawley, CFP®
Sources:
https://www.carsongroup.com/insights/blog/about-last-month/
https://www.subutrade.com/p/markets-report-can-breadth-thrusts
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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.