The S&P 500 plunged -9.08% this week with Friday's close at 5,074.08. It's stunning to write and it brings back jarring memories to almost exactly five short years ago.
This week's decline records as the ninth worst weekly decline in the history of the index and is the latest example of the market trading beyond the limits of imagination. In last week's Update we wrote "we can't even count how many times we've written 'what a difference a week can make!' in our Sunday Updates over the years, and we hope to be able to write it again soon." Well, this isn't exactly what we had in mind. The price action this week, or the way the S&P 500 declined, was absolutely sinister too.
Monday saw the S&P 500 trade like a bottom was in. The index retested March's low at ~5,504 by briefly trading down to ~5,488 and then reversed to the upside from there. We closed Monday's session, and the month of March, at 5,611.85 and things felt good at the time. We then traded up to 5,695.31 on Wednesday and things were still feeling good at the time in terms of price action, and it was time for Trump to step up to the podium and deliver his "liberation day" speech (click here).
As Trump started to speak the SPDR S&P 500 Index Fund (SPY) actually traded higher after hours by more than 1%. The idea of reciprocal tariffs wasn't something that caught the market off guard. But as he kept speaking and brought out the chart showing the rate of tariff and the countries targeted, things got worse and worse and worse for SPY. Long story short, this new information he introduced to the market was unexpected and titled negatively, analogous to getting a shocking and surprise diagnosis at your annual physical, and it drove an element of extreme panic. The S&P 500 crashed over Thursday and Friday, falling -4.84% on Thursday and -5.97% on Friday.
This marks just the fifth time in the history of the S&P 500 that it fell more than -4% two consecutive trading days. Its two-day decline of -10.53% is also the fifth worst two-day plunge on record.
For reference, the precedent for both of these statistics is only March 2020, November 2008 and October 1987. So, the price action this week has already cemented its place alongside the biggest crashes in the history of the S&P 500. To make matters worse, we can't even say that the S&P 500 crashed - because we're still crashing. We didn't exactly finish Friday's session with any real signs of life.
During volatility earthquakes of this magnitude it's imperative we don't spend too much time, effort or energy thinking about the days ahead. On a day-to-day basis, all bets are off, unfortunately. There is no visibility, only volatility. For the week ahead, there is no telling just how crazy things get and that's in both directions. It's a headline-driven market and nobody knows what headline is coming next.
Instead, we have to move to higher time frames to find a bigger and more important picture and message. When we think about the weeks ahead, the slope of the crash suggests the S&P 500 will be zero within weeks. While the price action feels totally bidless, we're not headed to zero within weeks. This sets the stage for a stunning "bear market rally".
"Bear market rallies" (BMRs) are often the most powerful of advances. In fact, the best trading days in the history of the S&P 500 occurred in BMRs.
BMRs tend to retrace roughly half of the prior decline, at a minimum, and leave the price of the S&P 500 taking one step forward after having taken two steps back. We firmly and adamantly believe one is coming, we truly believe it's inevitable, but we have no idea when or from what price the "bear market rally" begins! For example, the S&P 500 sliced through any and all "support" levels this week like a knife through butter.
Now, we've placed a bullseye between the ~4,766-4,966 price region and this is where we have conviction in the idea that the S&P 500 will find its footing. In other words, we don't think it gets worse than that here in the month of April.
That's roughly -2% to -6% lower than Friday's close. Through these lenses, the brunt of the downturn is behind us. This region is noted on the chart below in the shaded yellow rectangle and it marks a confluence of support via the 200-week simple moving average (solid red line), old "resistance" becoming new "support" via 2021's peak, and early 2024's weekly low at 4,967. We're also very "oversold" across both daily and weekly time frames - note the weekly relative strength index (RSI14) on the top of the chart below at 27.65, its lowest reading in five years.
Using basic Fibonacci retracement levels, a typical "bear market rally" suggests the S&P 500 trades back up to the ~5,500 region at some point before mid-May.
We believe this is likely no matter if the S&P 500 ultimately bottoms at ~5,000, 4,900, 4,800, or even 4,700. We view the S&P 500 at the moment like a beach ball being held underwater. We can hold it down, we can maybe even get it down further, but at some point it will come popping up to the surface. This is why we believe the S&P 500's risk/reward profile at the moment is at worst equal to, and at best skewed favorably to, the upside.
A decline toward ~4,800 over the coming week is a drawdown of -5.4% relative to Friday's close in exchange for the probable "bear market rally" upside toward ~5,500 over the weeks ahead, which is upside of nearly 10%. So, the risk:reward is effectively ~-6% on the downside and roughly +10% on the upside. If we reference back to the 2020 and 2008 bear market rallies, from March 2020 and November 2008 both of them saw the S&P 500 actually trade up by more than 15%. This is why we believe both short-term traders and long-term investors shouldn't be running for the hills at the moment. With the luxury of hindsight, the time to panic was days, weeks or even months ago, but the time to be patient is now. There's more turbulence ahead, but the brunt of the turbulence is behind us in our view.
Finally, we want to reference back to a section we wrote in our Update from March 2020. We've been through this before, almost all of us, and it's important to keep our emotions at bay and focus on what's on the other side of this.
"Moving our lenses to the months ahead, we have all the faith in the world that, collectively, we will science our way out of this, slowing the spread of the coronavirus paired with effective treatments and ultimately a vaccine. We have no doubt our economy, and the collective behavior of society, will attempt to get back to business as usual at some point into the not too distant future. We have no doubt our economy will be absolutely skyrocketing at some point in 2021 and beyond."
We wrote this on 03/22/2020 and we feel the exact same way now. By 2026, especially the back half of 2026, we firmly believe the economy will be rocking and rolling.
Remember, this week's crash is an own goal (implying the administration's brought it on itself), and it's one of the worst own goals in our country and market's history. However, a single own goal doesn't determine the outcome of a match, and in the world of markets the game never ends, the score simply changes.
We're all down right now, but for every action there is an equal and opposite reaction, and the future now includes lower interest rates (interest rates plunged this week), lower inflation (while a global trade war is inflationary, prices will fall under their own weight given a tepid consumer given the destruction in the wealth effect), and some sort of resolution to the tariff war is inevitable at some point.
Whether intentional or not, the administration has now positioned itself to be both the arsonist and the firefighter, and it's only a question of how bad the fire gets before the market finds conviction in the idea that they will extinguish it.
Few would deny that Trump is best described as a narcissistic authoritarian, so we think it's mostly safe to assume he revels in the idea of taking credit for putting out the flames he created. It's just a matter of when in our view, but with Trump it only takes a single tweet, or perhaps Elon can get to him (click here). Any favorable jawboning will lift the S&P 500 to the upside.
As you can imagine, the carnage was everywhere this week and there was no place to hide. All 11 sectors within the S&P 500 declined on the week. The defensives all did well, relatively speaking, with consumer staples falling a mere -2.43% and utilities falling -4.42%. The biggest decliners on the week were financials, technology and energy. All three sectors fell by more than -10%, with energy recording a massive -14.79% decline. The "Magnificent Seven", as measured by the Roundhill Big Tech Index Fund (ticker symbol MAGS), fell -10.15% this week. MAGS is now down -15.35% the last four weeks.
As for the week ahead, two words...buckle up. The Volatility Index (VIX) closed Friday at 45.31. There aren't exactly a ton of calendar months that have seen the VIX reach the 45 level over the last 30 years, excluding overlapping time periods. A VIX at ~45 implies daily moves for the S&P 500 in the ~3% range. Volatility of this magnitude is going to tug at your emotions, one way or the other, so we fully support our readers doing everything they can to be calm and disciplined and "mute" the noise.
Emotions like fear, worry and anxiety won't change a thing - other than negatively affecting your health! There is nothing you can "fix" as it relates to market volatility - it's a feature of the equity markets, not a bug. We all know equity investing is "no pain, no gain". Well, we had a lot of gain these last two years, so now we're dealing with some pain. For those of you in San Diego, get outside and enjoy the warm weather this week...that will make the pain a pinch more tolerable!
S&P 500 Primary Trend - Down
Our work now labels the primary trend for the S&P 500 as down, or "bearish". Importantly, this occurred at March's monthly close, marking this Monday's rebalance one of the luckier tactical asset allocation exits in our career.
Ironically, we saw a tactical asset allocation exit in February 2020 too, so tactical asset allocation has gotten lucky each of the last two market crashes. Critics of monthly rotational strategies often reference "timing luck", and their points are valid, but sometimes "timing luck" means that you get really, really lucky.
Now, during downtrends, long-term investors are best served battening down the hatches, that is investing more conservatively. During downtrends, it's prudent to emphasize capital preservation rather than capital accumulation. The name of the game during downtrends is to ensure your portfolio can live to fight another day, to ensure that any losses that are incurred during the downtrend are then easily recoverable the next time the S&P 500 begins a primary uptrend.
Importantly, we have no idea when the S&P 500 will begin a new primary uptrend, nobody does. It could be sooner, it could be later. It feels at the moment like it's definitely later rather than sooner, but feelings are never a good predictor of what's to come. Just look at how we were feeling at Wednesday's close as the most recent example.
During "bear markets", the primary objective for long-term investors is to survive, to make sure their portfolio can live to fight another day. In plain English, we believe this means to strive to lose no more than -15%-20% of your portfolio over the full market cycle.
The first -10% decline is always virtually impossible to sidestep as it's typically sharp, fast, violent and analogous to a sucker punch...you don't see it coming. Even the most "bearish" of folks couldn't have envisioned the crash we just saw these last two trading days. So, consider the first -10% decline as the price of admission for any and all investment strategies.
It's the second major decline, the one that typically unfolds after the "bear market rally", that we believe prudent investment policy can have a really good chance at sidestepping. Two short months ago, few could have even imagined we'd be trading down nearly -18% below all-time highs in the month of April. However, fast forward to today and it's easy to imagine the S&P 500 trading down another -20% over the coming months. The wall of worry is absolutely gigantic, so much so that it's actually far more difficult to imagine the S&P 500 trading up 20% from Friday's close a few short months from today!
Given this perspective, it's fairly simple and straightforward to prepare your portfolio today to weather the potential equity market storm of tomorrow. Fool me once, shame on you. Fool me twice, shame on us. The price action has been flashing red lights for a a month now, with the warnings growing here in April.
If you haven't stepped on the brakes yet we do think the inevitable "bear market rally" will give you an opportunity to do so. But if you never plan to step on the brakes, then you're just blowing through flashing red lights.
The odds of experiencing a further devastating crash, or severe accident, are greatly increased. You might get lucky, you might be able to blow through the flashing red lights and avoid any damage, analogous to the S&P 500 being close to its bottom for 2025, but you'll only know that with the luxury of hindsight. Without that luxury, it's not a smart decision to blow through those lights, it's a risk long-term investors can otherwise diversify away from in a variety of ways.
And since risk is all that's guaranteed in the world of investing (returns are only expected), a prudent plan to manage risk is the antidote to market volatility. It's never too late to add one.
Happy Sunday!
Steve & Rick