Market Update June 8, 2020 – The S&P 500 is Recovering. Now What?

Published by Waycross Partners on

As the NASDAQ hit a new record high and the S&P 500 turned positive for the year, many market experts have been pondering the historic run since the pullback in Q1 2020, and their thoughts seem to share the same theme this market rally feels more like a bubble than a true reflection of the current economic and corporate climate.

A Booming Stock Market Could Come Back to Bite the Recovery – Sarah Ponczek of Bloomberg Businessweek, June 6, 2020

Stock Market Bullish Sentiment: Is It Extreme Yet? – John Navin of Forbes, June 7, 2020

A Striking Disconnect on the Virus: Economic Pain with Little Illness – Michael H. Keller, Steve Eder, and Karl Russell of The New York Times, June 6, 2020

Are Memories of 2009 Adding Fuel to the Market Fire? – Jon Sindreau of The Wall Street Journal, June 5, 2020

Historically, there has been a fairly clear correlation between EPS estimates and stock prices. However, during this recovery stock prices are ricocheting higher while EPS estimates continue to point to a downward trajectory.

This dispersion is significantly different from the interaction of these two data points in 2008, when flat to slightly upward trending EPS estimates coincided with the recovery of market prices.

With the S&P 500 posting its sharpest 50-day rally in nearly a century, investors and wealth management professionals are faced with a dilemma. They can continue to ignore the warning signals that seem to be blaring from every major news venue, telling them to take a closer look at their allocations and manager selection, or they can use this recovery as an opportunity to prepare for the next round of volatility most believe will inevitably occur.

As most portfolios have likely nearly recovered from the downturn in March and traditional stock and bond allocations come under pressure amid the continuing fallout from COVID-19, now is the time to put a plan in place for downside protection. As demonstrated by their ability to successfully weather the downside of the Great Recession and again in Q1 2020, hedged equity strategies serve as a critical part of this plan. Specifically, an allocation to a long/short equity strategy can help mitigate portfolio risk by addressing market volatility, and with the downside protection potential it provides, investors may be more likely to stay in the market and avoid missing out on gains as the market recovers.

Waycross Partners was founded more than 15 years ago specifically to manage long/short equity as its flagship strategy. Our investment team has significant experience actively hedging through a variety of market environments including extreme volatility, recessions and recoveries. If you believe your portfolio can benefit from our experience, please contact us to learn more.