Markets Take a “Black Swan” Dive

To say the current market environment is challenging is an understatement. The sudden and vicious nature of the decline since the S&P 500 peaked at an all-time high of 3,386.15 on February 19 has been historically unprecedented in some ways. It took only thirteen trading daysfor the index to plunge to 2,746.56 and inflict a -18.9% loss on investors. What’s more, the indicesthat track a broader range of stocks were down even more. For example, the Russell 2000 Index has declined -23% since its peak on January 16. The declines by some blue-chip names were even worse. Two examples are Disney (-32%) and JPMorgan (-34%).

The market has been under a selling cloud from the global spread of the Coronavirus for weeks, but the weekend decision by Saudi Arabia to flood the market with increased production of oil broke the back of an already weak energy sector and threatens to disrupt markets more broadly in the form of ratings downgrades and wholesale bankruptcies. The S&P GSCI Energy Index has lost over 50% of its value since its most recent peak in October of 2018.

Until this recent accelerated wave down in the price of oil, and despite a typical 10% holding in energy sector bonds by high-yield bond mutual funds, prices had been somewhat impervious to the impact of energy sector weakness. However, the sudden break in high-yield bond prices over the past few days has been enough to trigger a sell signal from our high-yield model, directing us to reposition Managed Income portfolios defensively.

I’ve studied historical price patterns all the way back to the late 1800s and have personally been trading for over 50 years. The remarkably sudden reversal from an all-time high and subsequent breath-taking plunge in just two weeks by the major stock indices has in some ways been unprecedented. I’ve learned to recognize early warning signs of coming weakness that have preceded every significant market decline prior to this one. The absence of those early warnings signs this time is testimony to how treacherous markets have become. That’s even more reason why one should be reticent to invest in a passive way that exposes one to disturbing downside volatility. There is no perfect method to identify exact tops and bottoms in the market, but the Managed Income strategy has compiled an admirable 28-year record, while avoiding most of the damage inflicted by the periodic corrections that forever recur in market prices.