Long Hot Summer
Posted on Sunday, May 31st, 2020
Years ago when my son was born we thought how cool will it be when he graduates in 2020. What a cool year!! 2020! Just imagine. Well, I can imagine a lot but I didn’t imagine this. We have spent a lot of time lately thinking about the year 1968. Why 1968? We have been focused on 1968 since January when the flu pandemic took hold in Wuhan, China. When the virus began to spread we searched history and found that the most recent flu pandemic had taken place in 1968. This week 2020 took another step closer to looking more like 1968 with the protests in the aftermath of the killing of George Floyd. The long hot summer of 1968 was filled with violent protests and rioting following the assassination of Dr King. For those of you that didn’t enjoy history class as much as I did let’s review how the rest of 1968 went. In August while most of the nation was suffering through a second consecutive summer of riots a false flag attack was enacted at the Gulf of Tonkin pushing the US deeper into the Vietnam War. 1968 was also an election year. The riots at the Democratic National Convention in Chicago that year were another massive low light in the history of the United States. May you live in interesting times! Hopefully, 2020 starts to attempt a comeback.
As for the market – After seeing its largest decline in one quarter we are busy following that up with what is on pace to be the best quarterly gain in over 20 years. Let the good times roll or time to take chips off of the table? We believe that this is still a reflex rally infused by the largest monetary support in history.
It is not uncommon for the “best since” and the “worst since” to occur in close proximity. Volatility leads to volatility. The largest single-day gains and the largest single-day loses have tended to occur within bear markets. In other words, there are times when remarkable strength is primarily a function of the remarkable weakness that preceded it. In these cases, strength ebbs and weakness re-emerges. We might label these instances “bear market rallies.” Other times, however, remarkable strength leads to persistent strength as so-called “breadth thrusts” emerge. Baird Research
You might not have noticed but there was a very large rotation from tech stocks and into cyclical stocks. It seems that investors have gotten a bit more cautious given large cap tech’s valuations. The Big Five large cap tech stocks – Google, Amazon, Apple, Microsoft and Face book have been carrying this market. Large cap tech and momentum stocks have far outpaced value for years. Is it time to get on the value train? Given where the economy is at this point we will need to see a bit more evidence before we change trains. A fall in the Big Five tech stocks will not help the market as their outsized weight in the indices will drag markets down with them.
There is a huge disconnect between where the market is valued and how the global economy is positioned. For months we have speculated that we may be stuck in a range in the S&P 500 between 2200-3000. We are at the top end of that range. Bank of America is out with a research note that says their top end target here is 3180. Regardless, given what is going on with China and the rioting in the US the bulls might have a hard time holding their gains. For the moment though, they still have the ball and by keeping the S&P 500 above its 200 Day Moving Average they could force reluctant investors back into the market. We still see Fair Value on the S&P 500 closer to 2350-2500 area. Market is still very fluid with most of the markets positive moves coming in the overnight period where volume is very light and markets are more easily moved. Stay safe.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.