Risky Business

Updated: Aug 10, 2021

The Delta variant-induced rise in Covid-19 cases is still capturing headlines, although we haven't seen a significant increase in the number of deaths occurring. A few states have mandated masks with a potential lockdown, but this is mainly political. Nevertheless, if hesitation around the prevalence of the Delta variant persists, we would expect a significant impact on the market.


As we keep an eye on Covid-related market behavior, it's also essential to evaluate market changes in the context of seasonality. Let's dive in.


Significant Data Growth by Season

Nearly 300 out of the S&P 500 companies reported data on earnings this month. Eight-eight percent of those companies have beaten their revenue expectations, and 87% have exceeded their earnings expectations. So we have revenue growth of 23.1% and earnings per share at 85.2%, starting to explain why the market has been up.

Let's examine each season more closely. We can immediately see the differences in appreciation of value, specifically in July. However, August, September, and October are historically rough months. For example, August's maximum/minimum return is down 14% and up 7%. In contrast, October has the lowest minimum historical return of 21.76%. Therefore, we are getting into the months where we need to be more cautious.

The Goldman Sachs chart above shows how many days have gone by since the last 5% pullback in the S&P 500. Currently,184 trading days have passed since the previous 5% S&P 500 drawdown. This marks the 15th most prolonged period without a meaningful pullback and is significantly above the historical average of 97 days. However, historically speaking, we are due for a correction.


Variables Impacting the Market

Gatewood Wealth Solution Market Spider Graph
Source: Gatewood Wealth Solutions

You've heard us mention that our GWS investment committee is becoming a little more cautionary in the market, especially heading into August, September, and October. The spider graphs above capture the reason why. In addition, these graphs reflect several vital points within the market that demonstrate the probability of having a market pullback, correction, or sell-off.


Money supply has been declining, and the yield curve is still positive, but it's significantly lower than last month due to declining interest rates. Regarding the bullish percent index, few companies make highs relative to lows because consumer spending has been down. Lastly, housing and manufacturing are still positive, while transportation has remained constant.


Money Supply

Money Supply 13 Week ROC vs SP 500 2021

In 2020, we saw a massive spike in money supply (green line). As a result, the annualized growth rate was about 60%. However, today's money supply (red line) and the S&P 500 (dotted line), which historically are tracked together, are beginning to trend down, slowing the growth rate.

Yield Curve - 2 Year Bonds (EOD) INDX

Then, when we look at the yield curve, we are beginning to see a decrease in growth. When a yield curve gets close to negative or almost zero, it is a significant indicator that the economy doesn't have enough cash relative to all the projects they put in place when the money supply was growing before.


If we don't have that correction in money supply, it could be detrimental to the market. We see the effects of high inflation in energy and food items especially. Energy is up to 10% annualized, where food and all other things are around 5%.

To learn more about how seasons affect market behavior, be sure to keep an eye out for our recap video on our YouTube channel and SUBSCRIBE!

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For detailed performance metrics, please don't hesitate to contact your lead advisor. And, in the meantime, be sure to keep up to date on Gatewood Wealth Solutions through our daily 3x3s and our weekly market insights on our YouTube, LinkedIn, and Facebook accounts.


Disclosures:


Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


All performance references are historical and are no guarantee of future results. In addition, all indices are unmanaged and may not be invested directly.


Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.


The opinions in this material do not necessarily reflect the views of LPL Financial.


The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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