Wennco Market Views: January 2020


January 2020: Coming off a 31% + year in the S&P 500 (total return), investors kept prices right where things left off, going up. Equities were well-bid for most of the month – up until the Coronavirus started to spread - unlocking fears of global economic impacts (especially in China). If the last day of January felt completely different than any single day in months, that’s because it was different. Indices actually fell 1% +, something that hadn’t happened since October of last year. In bond-land, after trying break over the technically-significant 1.80-1.85% level on the 10-yr, yields collapsed all the way down to 1.50%. Oil fell to its lowest levels in a year on Coronavirus virus fears. For a few days, it seemed and felt that the uncertainty around this virus, and its possible implications on the global economy, replaced US-China trade fears. Early into February, and it does feel like the market is shrugging off any real contagion.

Earnings season is about halfway done for S&P 500 companies. On balance, EPS have beaten expectations by about 5%, while revenue has barely beaten consensus estimates (about 1%). The corporate bid has started to pick up, and will accelerate as companies move from restricted to “all clear” to buy back their own stock after their earnings blackout periods end. Although we’re somewhere in the middle of earnings season, it doesn’t feel like it. While some large moves in single stocks have occurred, other forces are at hand. Markets are in a vacuum mode. And in the near-term, current equity market valuations may have little to nothing to do with the performance that lies ahead this year; but in the medium-term, it probably suggests returns like 2019’s will be a stretch to assume happening again for some time.

US Elections will start taking center stage over the next couple of months. President Trump will most likely – one would think – bring out the big guns over the next 8-9 months in order to keep asset prices high through the election. This, combined with the consensus messaging that the big picture for equity markets remain favorable with low rates, accommodative central banks, and global PMIs that have bottomed, has created a frenzy. Risk Parity & CTA Funds are likely getting more and more long into this move higher – and these groups have proven ‘market-moving’ in either direction. When some selling starts (and more than 1-2%), it’s likely these groups could add to the pressure on the downside. However, corporate buybacks will be free and clear nearly across the board within a few weeks, which always provides some support with their price-insensitive bids.

I think if markets continue this impervious mindset, small caps can make up relative performance to the S&P 500. And within the SPX/large cap sectors, financials and other value sectors have a good shot of outperforming growth this year. In particular, large cap banks have been trading well, even with yields back at multi-year lows (or within bps of them). They didn’t lose much ground when yields fell to 1.50%, and have significant upside for when rates do start to move higher – and stay higher. And within financials, regional banks have a lot of ground to make up vs. their larger peers, especially if oil proves to stabilize at the important $50/bl level + rates moving up at the same time = a nice catch up trade in a subsector with ‘relatively’ attractive valuations.

In sum, I think much of the move this week has been investors shelving the idea of the virus spreading, which has given way to oil ‘stabilizing,’ rates ‘bottoming’ and heading ‘up’, and any US-based company with heavy reliance on China - from a business model/revenue standpoint, ‘recovering’. Of course, ‘stabilizing’ means $50/bl in oil, heading ‘up’ means rates bouncing off all-time-lows (nearly), and individual equities ‘recovering’ means getting back to all-time-highs and beyond.


SPX Monthly Chart

Source: Bloomberg & Wennco LLC

Notes on the Nasdaq

Source: Bloomberg & Wennco LLC

S&P 500 Earnings Results vs. Estimates (thus far)

Source: Bloomberg & Wennco LLC

SPX Earnings Growth

Source: Bloomberg & Wennco LLC

Commodity Returns in 2020’s First Month

Source: Bloomberg & Wennco LLC

WTI Crude Oil

Source: Bloomberg & Wennco LLC

Mega Cap Oil Names in January

Source: Bloomberg & Wennco LLC

VIX Net Short Contracts

Source: Bloomberg & Wennco LLC

The Usual, Unusual AAPL Market Cap Chart

Source: Bloomberg & Wennco LLC

10-yr Treasury Yields

Source: Bloomberg & Wennco LLC

30-yr Treasury Yields

Source: Bloomberg & Wennco LLC

Hang Seng

Source: Bloomberg & Wennco LLC

TSLA Batman Pattern Forming

Source: Bloomberg & Wennco LLC

Small Caps Have Yet to Reclaim All-Time-Highs

Source: Bloomberg & Wennco LLC

FED’s Balance Sheet

Source: Bloomberg & Wennco LLC

Welcome to Club Trillion, Google

Source: Bloomberg & Wennco LLC

Global Index Returns, P/E & Forward P/E’s on 1/31/20

Source: Bloomberg

PMI’s Rebounding

Source: Bloomberg & Wennco LLC

S&P 500 / Small Caps Ratio (10-yr, price only)

Source: Bloomberg & Wennco LLC

S&P 500 / Small Cap Total Returns Over Same Period

Source: Bloomberg


Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):

US - China Trade Talks & Virus Outbreak: Trade talks have become much less of a market driver, for the moment, and the virus outbreak has become much more of a factor.

Oil remains over $50/bl, but looks vulnerable: Higher oil prices with slower global growth isn’t a good combination. Away from that, $50 remains a key level to hold for all markets, especially high yield. The virus scare has, among other reasons such as OPEC, has evaporated the bid over the past month. WTI Crude fell 20% over the past 5 weeks. The market is likely waiting for more clarity on containing the virus, OPEC’s next move, or both, before reversing its downtrend.

Earnings and Guidance: Earnings season is about halfway done. On balance, EPS has beaten expectations by 5%, while revenue has barely beaten consensus estimates. Looking at growth vs. last year, both EPS and revenue are weak.

Interest rates and the Fed: In a world of slowing economic data, bonds will remain well bid. Are rates still too high here in the U.S.? The German 10-yr is far into negative-yielding territory. Watch 1.80-1.85% in the 10-yr Treasury. In January, 1.80-1.85% didn’t hold, and yields fell sharply/bonds rallied on the heels of a flight to safety. Where rates go will affect, among countless other factors, sector and factor rotation within equities.

Debt: Debt quality is deteriorating at the same time debt levels are very elevated. There’s roughly $23 Trillion in total US Debt for the first time in history. While there has been some deleveraging in households and the much of the banking sector since 2008, both corporate debt – away from financials - and debt to GDP are at nosebleed levels that can add fuel to the next bear market. The growth of the triple BBB corporate bond market is especially worrisome.


Wennco Downshift Hedged Equity Strategy Update:

Since inception (7/1/18) through 01/31/20, Downshift has returned 2.77% (net of Wennco fees only) vs. -0.29% for the HFRX (Hedge Fund Research Equity Index), 22.41% for the S&P 500 Total Return Index, 12.46% for the Bloomberg Barclays U.S. Bond Aggregate Total Return Index, and 7.02% for the BXM Index (CBOE S&P 500 BuyWrite/Covered Call Monthly Index). In 2019, Downshift returned 7.35% (net of Wennco fees only). During the first 6 months of the Downshift’s inception, Q3 & Q4 of 2018, the strategy returned -2.07% (net of Wennco fees only) vs. -6.86% for the S&P 500 Total Return Index.

Downshift is an all-weather strategy that helps clients stay invested in equities with potentially less volatility and reduced risk, and can also serve as a fixed income replacement strategy.


1) Elimination of market timing while staying invested in equity markets

2) Reduction of portfolio volatility and beta

3) Owning uncorrelated return streams is important to preserving wealth, and especially makes sense in late in market cycles (like where we are today). Bonds have become less uncorrelated to equities, and investors need more reliable sources of protection in risk-off markets. Downshift ETF has two parts which are negatively correlated: long-dated and actively managed S&P put options, and actively managed covered calls that strive to increase both portfolio yield and total return

4) Wennco Downshift Strategy avoids many hassles of owning traditional alternative investments: our strategy is fully transparent, 75bps vs. 100-200bps, and very liquid. It is also easy to understand and articulate

5) Equity market exposure with lower volatility is a more attractive investment than adding fixed income exposure at prevailing yields, in our opinion

Downshift is available to invest on Schwab’s Marketplace Separately Managed Account Platform. Our latest 2-pgr can be found here: https://www.wenncoadvisors.com/wenncodownshift-etf-strategy


Have a great February. Stay nimble (and warm) out there.



Chris Wenner

CIO & Head Trader

Wennco Downshift Strategies

750 Hammond Drive, Building 5

Atlanta, GA 30328

678-257-2726 (o)

203-984-4287 (m)




750 Hammond Dr.  I  Building 5  I  Atlanta GA 30328  I  678.257.2726
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Wennco LLC is an SEC registered investment advisor located in Atlanta, Georgia. Wennco LLC provides asset management services utilizing the Wennco Downshift Strategies and Customized Option Overlay Solutions.