Martin Pelletier: We have not yet seen the surrender across the board of previous errors
It was amazing to see the daily market swings, but it turns out that many are still trying to give the market time to buy a selloff, a strategy that is like catching a falling knife, as the S&P 500 has sold more than 18 cents per share since January.
For those wondering if we’ve finally hit the rock bottom, keep in mind that the corrections can vary significantly from a few months to a few years, with the average S&P 500 peak-to-true drawdown during the Second to Middle Recessions was 24 percent world war, Goldman Sachs Global Investment According to research.
That said, there are some big outlaws, including 48-percent revisions in 1973, 49 percent in 2001 and 57 percent in 2008.
For some additional perspectives, the S&P 500 has declined just five percent in the last 12 months and is trading at the same level as in March 2021. We still haven’t seen the capitulation across the board seen in the previous meltdown. According to City strategists quoted by Bloomberg, less than 30 percent of the S&P 500’s components have reached a one-year low, compared to 50 percent in 2018 and 82 percent in 2008 during the global financial crisis.
How long will this sale last? Markets could recover quickly during the Covid-19 revision in 2020, or years, as it did in 1929 to 1932, 1973 to 1974, 2000 to 2002, and 2007 to 2009.
We think this seems a bit different, as both stocks and bonds are revising and since the 2008 financial crisis the central bankers and their very favorable policies have made investors very comfortable and overweight for period exposure.
But persistent inflation is forcing central bankers to inadvertently raise interest rates, affecting stocks and bonds that are sensitive to high rates, such as long-term government and corporate bonds, as well as certain stocks in the technology sector.
Looking ahead, we are concerned that this monstrous trade-off, as it was during the 2000 technology bubble, continues to have the potential to launch the next low-investment commodity cycle, as it does today.
Then, according to research by Marathon Research Advisors, the tech sector grew by about 1,582 percent, dwarfing the 161 percent profit of top product stocks from 1990 to 2000, but lost 59 percent in the following decade while commodity stocks rose 253 percent.
Today, counting fast-forward and marathon, tech stocks have risen 582 percent since 2009, while commodity stocks have fallen 34 percent.
One of our favorite product fund managers, French businessman Pierre Andurand, got some interesting insights on the subject via Twitter.
This does not mean that great technology companies are out of business. Away from it. But that may mean they are not good stocks. Take Cisco Systems Inc., an outstanding company that traded over US $ 77 in March 2000, dropped to US $ 10.50 in September 2002 and is slowly recovering around US $ 42 today.
This is an extreme example, but it is one that nevertheless focuses on the risk of making concentrated bets in any one sector. It has paid off well over the past decade or so, resulting in higher performance for managers who weigh more than the tech-heavy S&P 500, but inflation is likely to be the catalyst to rebalance the market in other traditional sectors such as commodity stocks.
Instead of holding a double and falling knife, investors may want to take a different, more balanced approach, just in case the correction in long-term stocks continues as in the past.
Martin Pelletier, a senior portfolio manager at CFA, Wellington-Altas Private Council Inc., who serves as Trivest Wealth Council . Planning.
