3/15/2019 Weekly Update: Looking Back at Our End of Year Letter
by Zach Marsh on Jun 7, 2019
S&P 500 +0.4%
10 Year Treasury -0.98%
Weekly Update: Looking Back at Our End of Year Letter
After last week’s 2.1% decline in the S&P 500 index, the market bounced back strongly this week, finishing up over 2.8% on the broader index. This week’s gains took the S&P 500 above levels not seen since November 7th of last year. The Dow Jones Industrial Average finished up the week 1.5% higher despite the fact that the stock with the highest weighting on its price, Boeing, finished the week down over 10.5% following the crash of its 737 Max model in Ethiopia, leading to a grounding of all models around the world.
Whether this push above the previous resistance level of 2815 in the S&P 500 will prove to be a catalyst pushing the market higher, or a “fake out”, will most likely be determined early next week. However, in our opinion, opportunity for real gains appear somewhat limited at this stage. After a 20% rally from the December lows without a meaningful pullback, this substantial bounce from last fall’s collapse seems a bit long in the tooth.
At this stage we believe adding protection to the portfolio can help offset the misbalanced risk reward scenario, without completely removing upside participation. Should the market roll back over it would not be out of the realm of possibility for last year’s lows to be revisited. While the market seems to have thrown off many of the worries that caused the panic in the fall, namely the Federal Reserve has all but capitulated on further rate hikes and hope abounds for a resolution to the China/US trade war, many more concerns seem to be rising. Most importantly, the declining growth forecasts around the world, and persistence of extremely elevated PE ratios. On a cyclically adjusted basis the P/E of the S&P remains extremely high, trading at levels only eclipsed by the Tech Bubble of the late 90’s and early 2000.
While high prices can always go higher, and frequently do, the current market price for protection, as priced by the Volatility Index, is back to levels pre-dating the collapse late last year. All of these things combined seem to suggest discretion is the better part of valor.
Thanks for reading,
Zach and Dave
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