CAMS Weekly View from the Corner – Week ending 1/31/2020
February 3, 2020
We have crossed over the first month of 2020 which has offered a tale of two market environments is this short time frame.
The overall market started off with positive readings only to turn by mid-month with a corresponding downtrend. The S&P 500 did a bit of a roller coaster ride with it ending the month where it had started.
The building caution from market participants in the previous couple of weeks has been tied to the uncertainty of the Coronavirus. This collective market caution has built in its intensity in recent days as it has become hard to discern the ultimate impact.
With our highly valued markets it is especially important that economic story-lines continue to paint a picture of on-going and trusted growth.
When said growth backdrop becomes untrustworthy in a forward looking observation fear builds in markets.
When we speak on fear we look at various measures to help gauge the level of fear. One such measure that we have offered in these Weekly Views in the past is the Volatility Index. This index is known among market participants as the “Fear Gauge.”
Click For Larger View: http://schrts.co/RjtHzQHH
The above chart depicts the Fear Gauge dating back 18 months for some perspective. The blue line is a 200 day moving average line.
This line is often viewed as a line in the sand between healthy (north of) and unhealthy (south of) price behavior. In the case of the above Volatility Index “healthy” price behavior denotes an increase in fear and resulting challenges in stock prices. With this, north of the blue line is concerning.
For additional perspective, the red rectangle box identifies the 4th quarter of 2018. At that time market participants became increasingly concerned about the economic backdrop. While no changes in the economic story-line unfolded during the fear based episode (including follow-on months) market participants ratcheted up fear and stocks moved 20% lower within a couple of months!
Yes, fear and highly valued markets can lead to some incredible downside price action.
The red oval identifies our current experience. Now too we are seeing north of the blue line fear levels.
As we can see in the above view, just being north of the blue line does not lead to dramatic market downturns. It is the duration and behavior that is important. At this stage fear has increased to a notable level. Importantly, it is too early to tell how collective participants will handle this unknown. With this, as described in the 4th quarter of 2018, when fear builds it can feed on itself.
For our part, relative to asset management, we began to move assets toward safer areas of the market before this headline kicked up in earnest.
We had seen various pieces of evidence within market behaviors that offered participants were becoming more cautious underneath the obvious radar if you will. For now we continue to monitor various aspects of overall fear and will share accordingly.
We have no forward view – good or bad – on this currently, as fear, once it begins, is hard to predict in its trend. Monitoring and investing to your risk level is the operable strategy at this stage.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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