NASDAQ Nausea

September 15, 2020
Share |

Reopened economies around the world are continuing to grapple with resurgent COVID-19 cases in August and September, as governments in various regions were compelled to return to partial shutdowns or various restrictions. However, on a more positive note, it seems here at home in the U.S. that cases, fatalities, and hospitalizations are once again trending lower.

Rallies in riskier assets such as stocks and high yield bonds throughout the summer months have appeared to ignore and possibly underestimate the depth of economic damage and risks of successive waves of infections restarting a suppression of economic activity. Despite this under appreciation for unemployment and corporate defaults, the market has melted up to new all-time highs.

It took only 33 days for the S&P 500 to fall approximately 34% from its highs back in February of this year. This was one of the fastest drops of this magnitude in recorded history, and the S&P 500 has now rebounded and rocketed back up to new all-time highs in just under 150 days.

To put into perspective just how quick this all happened, we wanted to compare this extraordinary drop and recovery to all the other bear markets since the 1950s.

Shown above in the table we can see the average length of a bear market drop during both times when there was a recession determined after the fact and when there was a market drop without a serious economic event. The average time from a market top to a market low during recessionary periods was 18 months, and the subsequent time for the market to recover was 24 months!

While the percentage decline this time around (-34%) was similar to the average of all of the other recessionary environments (-37%), the length of the drawdown and eventual recovery happened in almost the blink of an eye compared to the long drawn out drawdowns and recoveries of the past.

Another widely followed market index is the NASDAQ Composite. It is a market-capitalization weighted index of companies listed on the NASDAQ exchange consisting of mainly technology, communication services, and consumer discretionary stocks. With such a large allocation to technology (40% of index), it is no surprise the top ten holdings make up a significant portion of the assets (roughly 46%). For comparison, the percentage of assets in the top ten holdings for the S&P 500 is 28%.1

Like the S&P 500, the NASDAQ Composite recovered from its lows hastily, but it only took about half the time (76 days) to reach new all-time highs compared to the S&P 500. More recently though, the index has been experiencing a little bit of nausea and has fallen close to 10% off its highs as of September 11th.

Since the inception of the Nasdaq 100 back in 1985, there have been 38 prior 3-day declines of 10%+ for the index. As one might guess, many of the 3-day drops of 10%+ for the index occurred during the Dot Com bust in 2000 and 2001. Furthermore, controlling for instances within a 50 trading day window as to eliminate multiple occurrences that happened too close together, forward returns have still been surprisingly positive.2

Below is a table from Bespoke Investment Group highlighting the forward returns after 3-day drops of 10%+.

Source: Bespoke Investment Group – Nasdaq Falls 10% But Still Above 50-DMA

Beyond the market pullback, the Federal Reserve shifted from targeting inflation at 2% to now targeting “inflation that averages 2% over time.” Simply put, periods where inflation is above 2% will now be consistent with this new definition of long-run price stability.

After the news came out the bond market saw the biggest reaction, as the 10-year Treasury yield rose slightly to 0.74%; however, the new initiative largely seemed priced in as the 10-year Treasury yield fell back towards 0.67% as of September 11th.3

1 Morningstar Direct; 2 Bespoke Investment Group; 3 FS Investments – Meet the new Fed policy: Low interest rates for years to come

IMPORTANT DISCLAIMERS AND DISCLOSURES

General Disclosures: Nova R Wealth, Inc. (“Nova R”) is a registered investment advisor with the U.S. Securities and Exchange Commission. Nova R provides investment advisory and related services for clients nationally. The information provided is for your confidential use only. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. 

This presentation is for illustrative purposes only. Past performance is not indicative of future results. The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. 

The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The index is unmanaged and does not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index. All returns reflect the reinvestment of dividends and other income.

Historical performance results for investment indices and/or product benchmarks have been provided for general comparison purposes only, and do not include the charges that might be incurred in an actual portfolio, such as transaction and/or custodial charges, investment management fees, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices.

The views expressed in the referenced materials are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward‚Äźlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.

This content may not be modified, distributed or otherwise provided in whole or in part to a prospective investor or someone considering investing in the portfolio models without the express authorization of the party delivering the presentation. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be direct investment, accounting, tax or legal advice to any one investor. Consult with an accountant or attorney regarding individual accounting, tax or legal advice. No advice may be rendered, unless a client service agreement is in place.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Nova R Wealth, who reserve the right at any time and without notice to change, amend, or cease publication of the information contained herein. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third-party sources and has not been independently verified. It is made available on an "as is" basis without warranty. Strategies and investment programs described in this presentation are provided for educational purposes only and are not necessarily indicative of securities offered for sale or private placement offerings available to any investor.