Independence Day Edition of Mullica Hill Money Matters
Welcome to the Independence Day edition of Mullica Hill Money Matters. Its hard to believe we are entering into the first week of July. I think it is also hard to believe how different life remains just a few short months after we first heard the words “Corona Virus”. In true American spirit, I have been proud and encouraged watching how so many have persevered to make the best of a very tough situation. It is that unique perseverance that will allow America to come out on the other side of this current battle victorious.
However, I think it is fair to say that the next few months will likely have a few unexpected fireworks explosions to our economic recovery and investors should be prepared for what this could potentially mean in both the short and intermediate term.
Our Investment Committee remains cautious regarding our investment allocations. I have said all along that I believed the market has priced in a near perfect recovery that has left no room for disappointment. Last week, as COVID began to surge in states like Florida, California, Texas and Arizona, the market was clearly rattled. Adding an additional concern was seeing states needing to backtrack and even halt their re-opening plans. You see, the market is not concerned with the virus itself but rather how its continued presence will hamper the US economic recovery. On Friday, we watched as the S&P 500 closed below its 200 moving day average. The 200-day SMA, which covers roughly 40 weeks of trading, is commonly used in stock trading to determine the general market trend. If a stock price remains above the 200-day SMA on the daily time frame, the stock is generally considered to be in an overall uptrend. It was able to reclaim its position above on Monday but a second decline below could show signs of increasing weakness of the index. The Dow Jones Index also showed concerning signs of weakness as it closed just a few points above 25,000 with Friday’s sell off. If the economic recovery continues to stall, this will likely disappoint investors.
We also continue in our belief that the market is significantly overvalued compared to its P/E (Price to Earnings) ratios. While it is true that the stock market is not the economy, it is directly tied to corporate earnings. Right now however, the market seems to be detached from this fact. It is interesting that as we went into 2020, the S&P 500 was pricing in earnings at $160 per share. We are currently pricing in earnings of $180 per share. That is a serious disconnect considering what we know about our current earnings. The only way to rectify this will be for earnings to come up or stock valuations to come down. The Atlanta Federal Reserve is estimating Q2 corporate earnings to come in at a historic negative 47%. History shows us that it is always valuations that wind up trending down when the market becomes this disconnected. The S&P 500 is also severely overconcentrated as about 25% of its performance has come from 5 stocks. We have not seen concentrations like this since the 70s and it points to weakness in the rest of the index. The Buffet indicator is currently showing a market overvaluation of 145.7%. The last time stocks were this overvalued was right before the Dot Com Bubble burst. Its no wonder why Warren Buffet is currently sitting on 137 BILLION dollars in cash right now.
Simply put, the market is currently full of greed and emotion. As investment managers, it is important we remain unemotional as we make investment decision for our client. Most investment mistakes happen because we allow our emotions to get in the way. As such, we choose to remain committed to using our math and rules-based process to steer our next steps. Currently, our program continues to recommend using defensive investment allocations. As such, we are using a mix of cash and fixed income options for our individual investors. We will remain there until we are given additional reassurance that the equity market risk no longer out weighs the potential reward. We are interested in investing in the areas of greatest potential, taking risk into account. When our indicators turn, we will concentrate in the areas showing greatest strength while avoiding weaker areas. This allows us to avoid areas that would drag down our performance.
We are looking forward to the coming months as we can hopefully prepare to round the corner of this historic time. We just need to remain prudent and patient as we have concerns there are a few more unexpected fireworks that have yet to appear. As the famous investor Charlie Munger once said, “the big money isn’t in the buying and the selling but the waiting.” Victory Fiduciary Consulting wishes you a very happy Independence Day and continued health and safety for you and your family.
Ashley Rosser, President
Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.
Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.