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7am Saturday

May 30, 2020

Good morning!

I hope you are enjoying summer! I know it’s not officially summer yet, but for me Memorial Day marks the beginning of summer. And it is by far my favorite season of the year. Within the past week we’ve been fishing, boating, Jeeping without the doors and top, picnicking, fishing, bike riding, fishing, sittin’ by the fire, and taking in every moment of summer! (Yes, a lot of fishing so far!) Most importantly we are making memories as a familiy, and I hope you are too!

Market Update

Now that trading for the month of May has ended let’s revisit the market.

Here’s a year-to-date chart of the S&P 500:

Here are some quick observations:

  • The S&P 500 closed at an all-time-high of 3,386 on February 19th.
  • From there the index dropped 34% closing at a bear market low of 2,237 on March 23rd.
  • The rebound over the past two months has surprised many as the index has gained around 35% since the low on March 23rd.
  • Remember that the gain required to get back to break-even is always higher than the loss. In this case, even though the drawdown was 34%, it will take a 51% gain from March 23rd to acheive the prior all time high level of 3,386.

If my last point is a little confusing, here’s a chart to show you how the gains required to recover from a loss are exponentially larger as the loss increases:

A few more observations that give us some clues to the trend of the market:

  • The price is now trading above all of the moving averages on the chart:
    • 8-Day (PINK): short-term trend
    • 21-Day (YELLOW): short-term trend
    • 50-Day (BLUE): intermediate trend
    • 200-Day (GREEN): long-term trend
  • The break-out above the 200-Day moving average is signficant as this green line represents the long-term trend of the market. With the market sustaining this move above the green line it’s an indicator that the long-term trend of the market is now BULLISH!
  • The 8-Day moving average has also crossed above the 200-Day. This is also bullish as we want to see shorter moving averages trading above the longer moving averages.
  • We still need to see the 21 and 50-Day moving averages close above the 200-Day to get “chart perfection” like we had during January.

What’s driving the change in the trend and the bullish action in the market? Well, in my opinion it’s 3 things:

1. First, and most importantly, the rate of change day-over-day for new COVID-19 cases has slowed dramatically. The chart below shows each day’s rate of change since the day we first saw 100 cases in the U.S. As you can see by the 5-day moving average (orange line) the trend is heading in the right direction and has been hanging out near 1% and declining.

2. We’ve seen the government inject record amounts of economic stimulus in the form of both monetary policy and fiscal stimulus. In other words, because the government forced an economic shutdown with the health response to COVID-19, the government is also determined that they are not going to let us fail as they have decided to backstop the economy.

3. The re-opening of the economy, albeit slowly, around the world.

4. The progress on a COVID-19 vaccine. The latest I heard was that it could be available by year-end.

Weekend Resources

+ The Road to Recovery: Which Economies are Reopening? (Visual Capitalist) – A great visualizaiton of which econonomies around the world are reopening. This chart measures the extent to which 41 major economies are reopening, by plotting two metrics for each country: the mobility rate and the COVID-19 recovery rate.

+ Miscalculating Risk: Confusing Scary With Danerous (Brain Wesbury)

+ How Taxes Impact Your Investments (The Invested Dads Podcast)

+ The Financial Advisor Without a Budget (The Everyday Advisor)
​

Have a great weekend,

Adam