The stock market has pulled back over the last month based on the realization that the trade war is not going to be ending any time soon. The effect of tariffs is that they provide an additional headwind for an economy that is already nearing the end of its cycle. This has investors worried and more apt to sell stocks, which seems to be the catalyst for the correction.
So how has the pullback in the stock market affected market technicals and what does it suggest about the current market environment?
The S&P 500 has gone sideways for the past year and a half (see chart below). We are at the same place today that we were at mid-January 2018. Therefore, long-term the market is consolidating and over a shorter-term basis, the market is correcting after a strong advance off the December 2018 lows.
Breadth has deteriorated, but not to the level that would suggest that we are in bear market conditions. At least not yet. We have not seen the rush for the exits that historically has produced negative breadth thrusts that are typical during times of major stock market stress. What we have seen is several breadth indicators turn negative and that is typical of a market correction.
Risk-off assets are outperforming risk-on assets. For example, risk-off securities such as Treasury Bonds, Utilities, REIT’s are outperforming risk-on assets like Semi’s, Technology, and Financials.
Small and mid-cap stock market indexes are underperforming which is another indication that the broader market is weak.
The fact that we are in a risk-off market environment suggests a heightened level of market risk.
Short-term, the stock market is correcting and market technicals are weak. However, market technicals have not deteriorated to a point that would suggest a full-fledged bear market is occurring.
The current correction could morph into something more negative and that is the reason that employing risk management strategies is so important during times like this.
Client Account Update
Our client equity exposure sits at around 54% which is about 12% lower than where it was sitting at the end of April. I noted that I had sold some stocks in my May 9th update: Tariffs and a Stock Market Sell-Off. This was done to cull out some of the weaker holdings and reduce market exposure during this period of short-term market weakness.
Our current equity holdings are made up of individual stocks that, on average, have very good relative price action compared to the market. We hold a number of defensive stocks that are not being as adversely affected by trade war worries and/or an economic slowdown. For example, we hold stocks in such industry groups as household & personal products, property & casualty insurance, packaged foods, and farm products.
Also, our stock holdings are not static. Each holding has a stop price (a price that if hit, the holding will get sold). This is one of the primary ways that I manage risk in our client accounts. As stocks get sold, our market exposure will naturally get reduced as long as we don’t use cash to buy additional equity positions.
Keep in mind, we are investing in securities that don’t go up in a straight line. Some volatility is to be expected. The focus of my investment style is minimizing the large drawdowns in client accounts that can occur during “major” stock market stress.
Summary of How I Manage Client Accounts:
- I do not use a buy-and-hold approach like most financial advisors. I believe this strategy, while good for young investors, can have severe adverse consequences for those in or near retirement.
- I use technical analysis to manage risk and preserve principal during major stock/bond market corrections.
- I have two basic models that I use to manage client accounts. One is conservative and appropriate for investors that are in or near retirement, and an aggressive model for younger more aggressive investors.
- I am a risk manager and will increase our risk level when risk in the market is low, and decrease our risk when risk in the market is high.
If you have any questions, or if you want me to review your retirement account allocations, please feel free to contact me.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.