Wennco Quarterly Recap & View - Q1 2020

By: Chris Wenner in Commentary 04/14/2020

MARKET RECAP & LOOKING FORWARD

S&P 500, Nasdaq, Dow Jones, Russell 2000, Transports & VIX’s March 2020 Performance:

Source: Bloomberg

S&P 500, Nasdaq, Dow Jones, Russell 2000, Transports & VIX’s Q1 2020 Performance:

Source: Bloomberg

The Fed is doing a great job of keeping the capital markets functioning. Policymakers are acting swiftly, and substantially. More of a Fed-built, atomic bomb of liquidity has been dropped versus a bazooka. Plumbing issues have been addressed and fixed. Among other pockets of asset classes, the Fed will buy junk bonds (if downgraded after March 22). That’s incredible (in my opinion. Just incredible). Additional Fed-driven liquidity bombs are likely coming. The Treasury Department will be lending directly to the private sector. Individuals and businesses have to survive in the short and intermediate term. If this happens, the recession will be shallow and short-lived. Key, global policymakers are making it clear that they are here to do what’s needed to get to that other side. Here’s the link to the Federal Reserve Board’s most recent $2.3tn loan package: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm

I think – for the first time in awhile – it’s very hard to be overly bullish or overly bearish on global equity markets. The world has definitely changed. Looking at prices alone, markets might appear cheap(er) vs. the very recent history. However, there’s an incredible lack of visibility on growth, and most of the damage hasn’t been assessed yet. The stock market is trading like an event-driven fund. Buybacks have been such a big piece of markets and has served as a price-insensitive bid for years. To put the numbers bluntly, about $4 trillion of stock buybacks over the last 10 years, funded by roughly $4 trillion of corporate debt, certainly helped take and keep the market at all-time-highs. At the moment, roughly 75% of current buyback programs have been cancelled. News around buyback programs are very important. Additionally, the Forward P/E Ratio of the S&P 500 is now relatively close to what it was in mid-February (chart below). I hope this upcoming earnings season proves this incorrect (which seems unlikely), but equities (using the S&P 500), aren’t particularly cheap right here and now.

A couple of predictions: we come close to retesting the lows around 2240 on SPX, but the bottom has been put in (or will be put in near those same 2240 lows. I think SPX attempts to make more of a standard ‘W-pattern’ than it has so far – and will then make its way towards, and probably above, 3000). Markets remain volatile, and 50-100 handle + days on SPX – in both directions – happen frequently for several more weeks and months. Realized vol stays high, as does implied vol. There will be some kind of a recession – but it will be very short-lived. Earnings of S&P 500 companies will have to be massively depressed (at least vs. the previous several earnings’ seasons) for the next several quarters (which, per the above paragraph, doesn’t support a continued, straight-up move from here). Real estate will likely be a frozen market for the next several quarters. With social distancing requiring no-touch closings, one has to think that most buyers and sellers are deciding to just wait it out. Finally, I think that oil is very interesting down here (for a 2-month+ time horizon). When the impact of the virus subsides and demand comes back, oil could easily double from here (which is roughly $23.25/bl on WTI).

Here are a few other things that I’m watching/keeping an eye on: 2500 on the S&P 500 (the long-term uptrend), 2600 on the S&P 500 (the current uptrend – give or take a few handles – off the recent 2240 low), AAPL & MSFT, the Russell 2000, interest rates, oil, the USD, and Shrek with our 4 little boys!

These are irregular times. Things will get better. I hope that you and your families‘ are hanging in there and staying safe. “Tough times don’t last…tough people do.“

CHARTS & THEMES WORTH WATCHING

Federal Reserve Balance Sheet – back in expansionary (extreme) mode

Source: Bloomberg & Wennco LLC

Nonfarm Payrolls Collapse

Source: Bloomberg & Wennco LLC

Jobless Claims

Source: Bloomberg & Wennco LLC

Mortgage Applications

Source: Bloomberg & Wennco LLC

Economic Forecasts (US)

Source: Bloomberg

US Interest Rate Probabilities

Source: Bloomberg

S&P 500: 2500 still key

Source: Bloomberg & Wennco LLC

S&P 500’s Forward P/E Ratio

Source: Bloomberg & Wennco LLC

SPX Monthly Bollinger Bands (March got ‘beyond meated‘/overcooked)

Source: Bloomberg & Wennco LLC

VIX

Source: Bloomberg & Wennco LLC

VVIX

Source: Bloomberg & Wennco LLC

VIX Net Short Contracts (much less short vs. the end of 2019)

Source: Bloomberg & Wennco LLC

Oil Spill (Crude)

Source: Bloomberg & Wennco LLC

Commodities YTD Returns (thru 4/9/20)

Source: Bloomberg

MOVE Index (short-dated Treasury implied volatility)

Source: Bloomberg & Wennco LLC

10 Year Yields

Source: Bloomberg & Wennco LLC

2/10 Treasury Spread

Source: Bloomberg & Wennco LLC

The Ted Spread

Source: Bloomberg & Wennco LLC

Russell 2000

Source: Bloomberg & Wennco LLC

XLK (Tech ETF. Stopped on its important uptrend in March = great level to trade against & tech outperforming is a great thing for overall market)

Source: Bloomberg & Wennco LLC

Bloomberg World Airlines Index Cut in Half

Source: Bloomberg & Wennco LLC

U.K. & Europe Equity Market Returns (thru 4/9/20)

Source: Bloomberg

SOX Index (Semiconductors)

Source: Bloomberg & Wennco LLC

AAII Bulls Index

Source: Bloomberg & Wennco LLC

AAII Bears Index

Source: Bloomberg & Wennco LLC

Bloomberg Risk-on Risk-off

Source: Bloomberg & Wennco LLC

Bloomberg World Equity Market Cap

Source: Bloomberg & Wennco LLC

Transports

Source: Bloomberg & Wennco LLC

DXY (USD) vs. SPX

Source: Bloomberg & Wennco LLC

S&P 500’s Leaders & Laggards

Source: Bloomberg

High-Yield (HYG ETF)

Source: Bloomberg & Wennco LLC

Amazon: proving its moat is ‘tail-risk-proof’

Source: Bloomberg & Wennco LLC

 

CURRENT MARKET DRIVERS WORTH WATCHING

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

  1. Virus Outbreak: COVID-19 has had material impacts on every asset class worldwide. How much of that is priced in? Truly impossible to answer that today.
  2. Oil lost the $50/bl level: WTI Crude has shed -50% + YTD. The market is likely waiting for more clarity on containing the virus, OPEC’s next move, or both, before reversing its downtrend.
  3. Earnings and Guidance: There will be a material impact from the virus outbreak – how temporary this will be, and how strong it will rebound, are what matters. Earnings season is about to begin.
  4. Interest rates and the Fed: In a world of slowing economic data, bonds will remain well bid. Our 10-yr is now sub-1.00% for the first time ever, and it sure feels like our 10-yr yield might be going to zero. The risk/reward from here doesn’t look great; however that was the argument with yields 4x higher than here (which was not that long ago). Other Developed countries have their 10-yr in negative-territory; maybe that’s where we are headed? Where rates go will affect, among countless other factors, sector and factor rotation within equities.
  5. 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 STRATEGY INFORMATION

Wennco Downshift Hedged Equity Strategy Update:

Downshift accounts that started at the end of February, 2019, have returned -2.99% (net of Wennco fees only) vs. -8.68% for the HFRX Hedged Equity Index, -5.18% for the S&P 500 Total Return Index, and -14.31% for the BXM Index. Since inception, the composite Downshift account has returned -9.28% (net of Wennco fees only), vs. -13.29% for the HFRX Hedged Equity Index, -1.54% for the S&P 500 Total Return, and -15.81% for the BXM 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.

WHY DOWNSHIFT TODAY?

  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. Downshift avoids many of the 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.

OUTSOURCED CIO SERVICES

We now have 2 Raymond James-affiliated RIAs who work with Wennco OCIO. We can also work with RIAs who custody on Schwab. Our models cover equities – including US, International, Global & Emerging Markets – diversified fixed income, and alternatives. Other than model delivery, we can also be hired to trade the models. We also offer white-labeled market notes for your RIA, with a similar format to the first half of this note, but catered to topics and charts that are most relevant for your firm. Please email or call me for information.

PLEASE PING ME ANYTIME FOR ADDITIONAL DOWNSHIFT or WENNCO OUTSOURCED CIO INFORMATION

Have a great April. Stay nimble and safe 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)

Chris@wennco.com

Cwenner5@bloomberg.net

By: Chris Wenner

Managing Director

Jonathan Molchan

Wennco's innovative strategies and robust OCIO capabilities are designed for RIAs, Family Offices, and high-net-worth individuals.

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