May 4th, 2020
Chadd Mason, CEO The Cabana Group
Can April’s Rally Continue, or is More Economic Disruption on the Horizon?
Equity markets finished off April with the biggest monthly gain since 1974. The huge rally followed an even bigger decline in March. Face-ripping rallies are common in bear markets, although it must be noted that this one was especially quick. The S&P 500 moved all the way back to its 200-day moving average, just below 3000, before meeting resistance and pulling back almost 4%. The 200-day moving average also coincided with a 61.8% retracement off the March 23 low. This is an important Fibonacci number and is a common level for counter-trend reversals.
In digging deeper into the stocks that have led the rally, it is clear that large cap technology has been the one standout leader. Names like Amazon, Google, Apple and Netflix make up a large part of the broad index’s weightings. These stocks have pulled the S&P 500, Dow and Nasdaq up, while almost everything else has been left behind and is still down 30-40%. During bull markets you want to see all stocks participating, not just narrow segments of the market. The fewer stocks leading the rally, the more tenuous its staying power. Huge swaths of the broad market are still bleeding profusely. These include airlines, retailers, energy, consumer discretionary goods – and everything tied to these important sectors.
We are in the middle of first quarter earnings season, and it is hard to evaluate how good or bad companies are doing. In excess of 40% that have reported are refusing to give guidance going forward. Even Warren Buffet reported over the weekend that he has sold all his positions in four major airlines for a $50 billion loss. That shows just how unsure he is of the industry going forward. We will see non-farm payroll unemployment numbers this week, and expectations are for jobs to be down 20 million. This will cause the unemployment rate to jump from 4.4% to 16%. That alone is simply jaw dropping. If these numbers persist and we see one fifth of the labor force out of work, we are in for a world of hurt. It does not matter how much band-aid money gets thrown at the consumer, people are going to be scared and for good reason. When people are scared that their children will go hungry or that they won’t have a roof over their head, they stop spending on other things. It is the spending on these other things that drives 60% of the United States GDP. The impacts of this sudden vacuum will be felt everywhere else sooner or later.
The point in all this is that these are unusual and potentially life-altering economic times. To all those proponents of a quick return to normalcy and the bull market of the past decade, I hope you are right. With that said, I am afraid it will require a vaccine or an effective treatment for COVID-19 for this process to start. The longer it takes for the medical solution to come, the longer it is going to take for our world to repair itself. It surely will, and we will come out stronger than ever, but how long that takes is anyone’s guess right now.
At Cabana, we remain in our most bearish scene, but are prepared to reallocate should conditions improve.
In mathematics, Fibonacci numbers, commonly denoted Fn, form a sequence, called the Fibonacci sequence, such that each number is the sum of the two preceding ones.
This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.
The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.
The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to email@example.com.