Market Pulse May 4th, 2022

ZENdexSM Portfolios

Worry less | Enjoy more

We invite you to call us to discuss how this data informs our strategy and how a ZENdex Portfolio could be a powerful addition to your overall investment mix. We weigh the data below heavily when developing our portfolio strategy, in which we aim to maximize the relationship between performance and protection while minimizing taxation.

ULTRA-CONSERVATIVE  |  BOND REPLACEMENT  |  GROWTH  |  MANAGED OPTIONS

No Bottom? No Problem.

The opportunities keep coming.

S&P 500 RELATIVE TO ITS ALL-TIME HIGH

For ZENdex portfolios, this is the picture of opportunity.
S&P 500 Top (A): 1/4/22
Subsequent Low (B): -15.69% 5/2/22
Currently Off High (C) : -13.76% 5/2/22
Correction Duration (D): 119 days
Recovery Value (E): 18.61%

Recovering from a decline of 15.69% requires a gain of 18.61% from the May 2nd low.

R = A = Point of Recovery

The S&P 500 is represented by the SPX and refers to the price return index, not the total return index.

S&P 500 RELATIVE TO ITS MOVING AVERAGES1

Historically, market bottoms have often occurred when the S&P has fallen three standard deviations or more below the average on the weekly measure.

While May 2nd showed us the lowest low since the January 4th top, the current 119-day long decline in the S&P 500 has not yet pulled it three standard deviations south of the average on our weekly chart.

Though our confidence may not have peaked that the market has bottomed, what we do know is that the May 2nd low created a wonderful opportunity on which we capitalized in our ZENdex portfolios for our clients.

Background: We look at the benchmark’s statistical deviation from its mean in order to determine whether to add or reduce risk. Within our ZENdex investment methodology, readings two standard deviations or more above the mean compel risk mitigation. Readings two standard deviations or more below the mean compel the addition of risk. The daily and weekly measures prompt more tactical/shorter-term action, while the monthly measure calls for more strategic/longer-term action.

TREASURY YIELD CURVE2 VS CONSUMER PRICE INDEX2,3

If the Federal Reserve tries to avoid a “hard landing”, many think inflation will enter double-digits and remain elevated for some time.

That would put added pressure on bond prices and stock prices.

Despite bond yields rising as their prices fall, bonds have a long way to go before their total returns garner appeal vis-à-vis inflation.

A diversified basket of stocks, we believe, gets more attractive as stock prices decline if you are in a position to take advantage of it as we are in our ZENdex portfolios.

Background: The stock market has only ever followed two patterns: that of decline-and-recovery* and that of consecutive new highs. Because higher inflation makes it more difficult for corporate earnings to translate into higher stock prices, the odds of extended periods of decline-and-recovery go up. This is of particular concern to people living off of their investments since drawing on the portfolio while it is down can impair its ability to recover and to therefore provide future income. ZENdex addresses this problem directly.

THE PHILLIPS CURVE4,5,6,7

 

The unemployment picture is good, but it’s tempered by the fact that civilian compensation is up only 4.5%7 verus year-over-year inflation up 8.54%.

Standards of living continue to take a hit, but guess what’s not? The U.S. Dollar.

Oddly enough, the greenback has been getting stronger since January 4th 2021.

Background: We follow the Phillips Curve to understand what impetus the Federal Reserve has to adjust interest rates, its balance sheet, or both. You don’t fight the Fed, as the old adage goes, and the Fed’s policy decisions will change the odds of a prolonged period of decline-and-recovery in the stock market.

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To find out more about how Thomas Financial can help position your portfolio to take advantage of market volatility, please email cfaassen@thomasfinancial.com or call us at (813) 273-9416.

Footnotes
  1. Source: thinkorswim desktop trading platform.
  2. Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield
  3. The measure of inflation is the year-over-year change in the Consumer Price Index (CPI). Source: https://www.bloomberg.com/markets/economic-calendar
  4. We are displaying inflation as measured by the Consumer Price Index (CPI). It’s worth noting, however, that the Federal Reserve states its goal for inflation in terms of the Personal Consumption Expenditures (PCE), which is highly correlated to CPI but can generate different readings. The PCE can be found here: https://www.bloomberg.com/markets/economic-calendar. For more information on how CPI and PCE differ, you can go to: https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2014-economic-trends/et-20140417-pce-and-cpi-inflation-whats-the-difference.aspx
  5. https://fred.stlouisfed.org/series/UNRATE. For our purposes, we are considering full employment to have been when the unemployment rate was at 3.5% just prior to the pandemic. Because the Federal Reserve considers many variables in arriving at what it ultimately deems to be “full employment,” the unemployment rate that represents full employment can, itself, be a moving target.
  6. Source: https://www.bloomberg.com/markets/economic-calendar
  7. Data for civilian income and inflation is year-over-year. Civilian income reported in Barron’s, May 2nd 2022 issue.

*Though we can observe, historically, that the stock market, as represented by the S&P 500 has always recovered from past declines, that it always will cannot be guaranteed.