In the NFL Today, It’s Just a Question of When
And there’s no controversy—the stock market is just like the NFL
After leading the way for most of the current bull market, the S&P 500 and NASDAQ Indexes are suddenly hobbling around like an NFL quarterback heading for the bench after being sacked.
We see this played out every week in the NFL.
There’s an old saying in football: it’s not a question of if a team will suffer injuries, it’s a question of when.
When I drafted my fantasy football team this year, I lucked out. I got the first pick of the draft! I had checked all of the rating services. There was no controversy over who the first pick should be. The opinions were unanimous. And I was going to be able to see the player in person in the first game of the season.
After an OK first half, the star running back went down hard on a tackle and did not get up immediately. Arizona’s David Johnson was injured. As he left Ford Field, I could see him holding his wrist in what looked to be an uncomfortable position.
As it turned out, his wrist was sprained badly. He would be unable to play for four to six weeks. So much for having the first pick in my fantasy football draft!
But that’s just how these things go. You do the research. There’s consensus on what to do. The probabilities are on your side. It’s all good. Then, out of the blue, what was good turns bad.
Some stock market indexes are injured but they are not out for the season
It’s true that the NASDAQ and S&P are not performing as well as the staid Dow Jones Industrial Average this month. And even 2017’s underperforming Russell 2000 has beaten them in the return race this September.
Sectors are experiencing a similar phenomenon. Health Care and Technology, which had been scoring repeatedly, are suddenly being outrushed by Financials and Energy.
Still, all of the stock indexes managed gains each of the last two weeks—and they registered new all-time highs as well.
The trend remains our friend. As we venture into earnings reporting season in a few more weeks, expectations seem to be for more end-zone celebrations in the days to come.
However, it’s not a question of if but when. Sooner or later, what is now the second-longest bull market in history will come to an end. And then it will cause injuries to most investor portfolios.
But do they need to be knocked out for the season?
Preventive steps investors can take
There are steps that every investor can take to prevent being forced to sit on the bench and miss the opportunities that stocks can deliver. As in football, preventive measures can help.
Today’s player knows that advance preparation is essential. Increased emphasis on physical training and diet can mean not only better performance in the field but also quicker recovery when the next injury happens.
So it is for investors. They can prepare in advance. They can diversify their portfolios rather than concentrate investments in this year’s top performers on the field.
However, to be diversified requires more than the conventional wisdom of the Wall Street crowd. A general portfolio of assets simply from various markets has been proven not to work as intended.
Instead, investors must diversify more specifically into assets that have a history of performing well in crisisregimes. Historically, that means not just stocks but also gold, bonds, and alternative investments.
“But they don’t do as well when stocks are soaring,” you say. To which I reply, “Exactly!” Unless you are a market timer, your portfolio cannot provide support when the market is injured if it only has investments that track stocks when they are rallying.
Investors also need to employ different strategies in their portfolios, rather than just “buy and hold.” Many of these strategies fit into the definition of alternatives. Few act in the same manner as stocks, especially during crises, when buy-and-hold strategies are most helpless.
And yes, tactical, market-timing strategies are especially appropriate for this alternative category. No, they are not going to get you out at the top. Most are trend-following strategies and are only going to get you out after the market has topped out.
But what’s important is that most dynamic, risk-managed strategies will mitigate the injury. That’s what many investors have experienced through the market downturns of 1987, 1990, 2000, and 2008.
Furthermore, as my Journal of Investing article, “Why Market Timing Works,” demonstrated years ago, the time to recover after a downturn is reduced by taking preventive measures employed by dynamic risk management. In other words, these investors will have less time on the bench and more time in the game.
Finally, it’s important to remember how NFL injuries can be different from stock market injuries. With the former, a good dose of rehab can put the player back on his feet before the season is over. But a 70%-plus loss like those experienced by Technology stocks in the crashes of 2000–2003 and 2007–2008 can put you out of the game for life. Rehab or surgery is not an option.
The only option is to prepare for the inevitable injury in advance. After all, it’s not a question of if, it’s a matter of when.
Financial market action
While this year’s hottest sectors and indexes have faltered a bit this month with what seems to be a change in leadership, it can’t go unnoticed that if the S&P 500 manages to close Friday (9/29) above the 2471.66 level (it closed at 2502.22 on 9/22), it will have been six up months in a row.
Historically, a six-month winning streak has suggested further gains to come. The month following the streak has averaged a return of about 1% (gaining ground 69% of the time), and the three months following the streak have registered average gains of 3.75% (with positive periods 84% of the time).
And when the S&P is up around 10% at the end of September (it‘s at 11% now), results since 1928 have been even better. Gains during the remaining three months have averaged about 5%.
With earnings reports once again back on the field this week (third-quarter reports are still a couple of weeks away), expectations for strong earnings and revenue trends are high.
No recession likely
Economic reports are continuing to churn up major positive yardage. Most reports this week exceeded expectations.
In addition, two very early warning signals of a recession were refreshed with new data this month. In both cases (housing stats and the ratio of leading to coincident economic indicators), the setup for a recession did not surface, suggesting little chance in the next six to 12 months. In fact, the level of the latter ratio suggests at least two years before another recession. Since bear markets usually come with a recession (1987 was an exception), this is good news for investors.
Investor sentiment (a contrary indicator) continues to be elevated. Seasonality, too, remains negative.
Interest rates have been rising, sending bonds and gold down for the month to date.
It is encouraging that the Federal Reserve did not call an audible last week, as it left rates unchanged. As the chart shows, since the Fed began broadcasting its rate decision in 1994, such a position by the Fed has led to the best short-term stock market outcome.
All in all, it does not appear that the market is about to get sacked. But as I am constantly telling myself, it’s not a question of if but when.
Weekly Edge: Hurricane Damage in Puerto Rico Threatens Medical Drug Supply
With an already brittle infrastructure, Hurricane Maria could send Puerto Rico back 20–30 years. Damage is estimated to be more than $30 billion, according to Market Watch.
MarketWatch also reports another unfortunate effect of the hurricane is its impact on the supply of life-sustaining drugs. Several health-care manufacturing facilities that supply drugs all over the world are located in Puerto Rico. According to the Food and Drug Administration, the supply of cancer drugs, immunosuppressants for organ transplants, and medical devices for diabetics could all be affected.
On a positive note, the facilities of drugmakers Amgen and AbbVie remain intact and operational. The hurricane is not expected to disrupt Amgen’s drug supply in part because the company has maintained a surplus in inventory to meet patient demand. Health-care manufacturing will play an import role in stimulating the recovery of Puerto Rico’s shaky economy. However, the Health Care sector is expected to continue to fall in the next coming weeks. The SPDR S&P Pharmaceuticals ETF decreased by 1% on Tuesday (9/26).
Sectors: The leading Sector Benchmark ETFs exhibited mostly negative shifts over the past week. Health Care and Technology both fell significantly. Momentum scores of most sectors decreased for the week. The only exceptions were Energy and Industrials. Telecom shot up incredibly, coming out of the red. The spread between the highest and lowest increased from 28 to 34. In terms of ranking, there appeared to be no general trend between cyclicals and defensive sectors, continuing the previous week’s trend. Technology sat above Utilities. Energy improved significantly from last week, jumping from 16 to 29. An overall decrease in momentum for most sectors suggests the potential for a market slowdown.
Factors: The leading Factor Benchmark ETFs had mostly mixed results for the week. High Beta and Small Size are now in the lead. Low Volatility and Market Cap sit at the bottom. Risk-off factors such as Quality, Yield, and Low Volatility were dispersed. Quality and Yield were toward the center, and Low Volatility was at the bottom. Overall, momentum for all factors decreased last week, with the average momentum score changing from 15.5 to 14.9. The spread decreased from 17 to 14.
Global: Rankings in the leading Global Benchmark ETFs were mostly negative week. Latin America and China remained at the top of the rankings, with Latin America having a slight lead. Most momentum scores decreased for the week. Developed and developing countries fell, with Canada being the only country rising, from 24 to 25. China decreased the most, from 52 to 31. The average momentum score globally decreased from 25.1 to 18.1. USA and the Pacific were at the bottom in terms of absolute rank. Developing markets have mostly fallen for the week: Latin America decreased from 47 to 33 and Emerging Markets fell from 32 to 16.
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