Weekly Commentary, 2/1/16 – 2/5/16
Google parent Alphabet Inc., replaced Apple as the world’s most valuable firm on a market capitalization basis. Meanwhile, the broader U.S. equity markets, represented by the S&P 500 Index, finished the week down a disappointing 3.04%. With both the year to date backdrop of repeated sizable market moves and following last week’s positive 1.75% uptick, this weekly market move might look fairly benign on the surface, but there was plenty of intraday volatility throughout the week as we headed into Super Bowl weekend.
If you are a football fan, you have probably witnessed the following scenario: the punt returner receives the ball, runs back toward one sideline, reverses field back to the other sideline, and ends up with a 3-yard loss on the play. That player ran some 60 or 70 yards only to lose a few yards of field position. The intraday moves on the S&P 500 Index this week were much like that football player. On Tuesday the S&P 500 declined sharply falling 1.8%. On Wednesday the S&P 500 climbed back up 0.60%, but it was a day of wild swings. The S&P 500 hit the 1914 level out of the gate, slumped down to a low of 1872, and rallied back in the afternoon to close the day at 1912. Thursday’s intraday moves were equally as volatile. The S&P 500 moved from 1921 down to 1891, back up to 1921, down to 1898, and closed the day up just .16%. On Friday morning the S&P 500 futures were up nicely, but a mixed jobs report resulted in a rapid reversal of the field. The payroll gain of just 151,000 jobs added missed the 190,000 estimate and the unemployment rate fell to 4.9% causing fears that wage pressure could dampen corporate profits. This resulted in the equity markets running backwards. So our S&P 500 “kick returner” ran some 100+ yards to lose 3 or 4 yards of field positon on the week. So far this year the S&P 500 is off almost 8%, and the broader NASDAQ composite index is down 12.76%. Also of note, the benchmark U.S. 10 year Treasury yield closed the week at 1.84% and is now below levels last seen early last year.
There are a number of factors that many industry professionals believe are contributing to this increased intraday volatility, such as concerns regarding China’s slowing growth, a slowing global economy, instability surrounding commodity prices, and oil in particular. However, one of the biggest concerns facing U.S. investors is the decline in corporate earnings and the negative earnings revisions. According to Bloomberg data, we are seeing the worst corporate earnings revisions since 2009. While this would always be problematic, it is even more challenging now given that U.S. equity valuations are still elevated.
From a technical perspective, risk levels remain very high. The vast majority of all of the technical measures we use to analyze market risk are still in deep negative territory. As such, it is reasonable to expect that the volatility we have experienced so far in 2016 will continue at least in the near term. Risk management and patience are key components of the Stadion investment process. We have yet to see enough improvement in our indicators or models to add risk back into our portfolios as we continue to play solid defense during these times.
The Stadion Managed Account Risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets the remaining 40-60% of each portfolio, Stadion uses a proprietary, rules based weight of the evidence model. The Flex portion of the portfolios remain in their most defensive position per the risk objective.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.