It’s been a while since I’ve heard anyone say this is a stock pickers market, however that is exactly what I believe is occurring. With ETF’s and mutual funds suffering declines in line with the S&P 500 (SPY) and the Dow Jones Industrial Average (DIA), many investors are lamenting “what do we do now”? This really depends on what type of investor you are and how you’re able to stomach current volatility. In this commentary, we will look at some options that long term buy and hold investors, indexers, and more active investors can do to potentially maximize returns as markets eventually stabilize.
Whether you are a devout index fund or ETF investor or own actively managed mutual funds, it is very likely that your funds have suffered some serious price erosion during the last several weeks. Many advisors in the industry have recommended well diversified investors to stay the course and I couldn’t agree more. However, there are some opportunities at this time to take advantage of the fact that many quality companies have declined far more than the mutual funds and ETF’s in investor portfolios. This presents a great opportunity to periodically move a portion of assets from funds that have declined to quality equities/stocks that have declined even more.
More conservative investors could look towards dividend paying equities like those found in the S&P 500 High Dividend Index (SPYD). Some of the top holdings in here are:
- Gilead Sciences Inc. (GILD)
- Digital Realty Trust Inc. (DLR.PK)
- General Mills Inc. (GIS)
- Crown Castle International Corp (CCI)
- Thermo Fisher Scientific Inc. (TMO)
- Kellogg Company (K)
- AbbVie Inc. (ABBV)
- Verizon Communications Inc. (VZ)
- AT&T Inc. 1.71% (T)
- Cardinal Health Inc. (CAH)
- Dominion Energy Inc (D)
- United Parcel (UPS)
- Duke Energy (DUK)
- Occidental Petroleum (OXY)
- Key Corp (KEY)
- IBM (IBM)
And many more.
More aggressive investors could look at the S&P 500 Growth Index (SPYG) which contains many of the top growth equities in the S&P 500. Some of the top holdings in that index are:
- Microsoft Corporation (MSFT)
- Apple Inc. (AAPL)
- Amazon.com Inc. (AMZN)
- Facebook Inc. Class A (FB)
- Alphabet Inc. Class (GOOG)
- Visa Inc. Class A (V)
- Mastercard Incorporated Class A (MA)
- Procter & Gamble Company (PG)
- Johnson & Johnson (JNJ)
- Adobe Inc. (ADBE)
- JPMorgan Chase & Co. (JPM)
- Home Depot (HD)
- Nvidia (NVDA)
- Intel Corp (INTC)
- Kimberly-Clark Corporation (KMB)
And many more.
Short term bull and bear markets versus long term secular bull and bear markets
Many readers have lamented to me that I might have missed the calls on television, that we have entered bear market territory. This is accurate as the S&P 500 and the Dow Jones Industrial average have declined by more than 20% over the preceding weeks. However, this does not mean that the longer term Secular Bull market is over. Although this is not part of the definition of Secular Bull Markets, we have been trading around the uptrend line in the market for the last several trading days. I am diligently watching and hoping we can find some support at these levels. As far as a simple definition for secular markets, according to Wyatt Investment Research:
A secular bull market is characterized by above average stock market returns by the S&P 500 for a long time, typically 10 to 20 years. Periodic bear markets spring up within a secular bull market until the next cyclical bull market takes over and carries the market to even higher highs. A cyclical bull market refers to one that lasts a few months to a few years.
By my interpretation, the longer term Secular Bull Market is still intact and as I write this, is now being refueled for the next leg up.
Market Risk Meter
My proprietary Market Risk Meter has been giving extremely low reading for the last two weeks. In the past, these types of readings have been commensurate with market bottoms. While this current market environment seems to be different than an economically driven downturn, most of the people I have spoken with believe that, as some of the dust clears, this market has the potential to rally powerfully on good news. Looking back to the nearly 2000-point upside move on 3/13/2020, I wouldn’t rule out that possibility.
An Outside Opinion
I have made some statements in past commentaries about Covid19 and now want to include some words from my neighbor, who conveniently happens to be an expert in mathematical modeling of infectious diseases with PhD in physics/mathematics and biology and appointment as an associate professor at the University of Tennessee:
Comments from Dr. Vitaly Ganusov
The markets seem to be reacting to the current and potential impact of the COVID19 pandemic. This impact is likely to be real – even if the disease does not hit as strongly as we may think. The currently implemented policies with social distancing and teleworking are likely to impact the overall productivity, and thus, GDP growth. What is the potential impact of COVID19 on the world and US population? This remains to be seen.
Researchers from the Imperial College in UK, specializing in mathematical modeling of epidemiological spread of infections just reported that without any mitigation, the USA could suffer 2.2 million deaths between March and August of 2020. Obviously, there have been many mitigation’s, per governmental bodies and via personal decisions, so it is likely that this maximum predicted number of deaths is unlikely to be achieved. Interestingly, this report also suggests that some of the recommended actions such as closures of schools and universities may have a limited impact on deaths (the need for critical need beds). Employing some of the strategies, such as staying at home may not work, unless these are continued for longer, and consequently reignite the epidemic when restrictions are lifted. This remains to be tested in China, which is expected to lift the restrictions on movement of people in the country in the near future.
How accurate are predictions of such mathematical models? Well, models depend on assumptions and predictions of mathematical models are the direct consequence of those assumptions. There are very few quantitative details about COVID19 that we know well, so predictions are inherently imprecise. What the current models do not include is the negative impacts of any types of interventions such as increase in other health conditions/diseases and costs associated with the interventions. When thinking about predicting the overall impact of an epidemic, Ebola outbreaks in Africa come to mind where mathematical modeling predicted millions of deaths and yet much less have died (about 20,000). Time will tell if worse case scenarios become reality. I personally doubt it.
There are many opportunities for investors to maximize their portfolios for throughout the current market frenzy. Periodically moving funds that have gone down to high quality individual equities, that have gone down more, may make sense for some investors. Selling pressure seems to be at extreme levels that are rarely seen. Like on 3/13/2020, I wouldn’t rule out the possibility for a powerful rally once some of the dust settles. Lastly, don’t confuse short term bear markets with longer term secular markets. The Secular Bull Market is bruised however, like in 1987, remains alive and well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained in this report or information provided does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation of an offer to buy or sell any security referred herein. Past performance may not be indicative of future result. No buy or sell orders may be given using the email, please call the above number to contact your Advisor. Christopher DeMaria is registered with and securities offered through Kovack Securities, Inc. Member FINRA/SIPC. 6451 N. Federal Highway, Ste 1201, Fort Lauderdale, FL 33308. Investment Advisory services are offered through Kovack Advisors, Inc. DeMaria Financial Services 865-332-5952 is not affiliated with Kovack Securities, Inc. or Kovack Advisors, Inc. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.