Go Back

Volatile Markets Continue as We Approach an All-Important Earnings Season: Market Commentary from Cabana’s CEO – September 28, 2020

2 years ago

  • Share this:

U.S. equity indexes continue to experience heightened volatility. This has been the case for much of September and should come as no surprise given the season and all that investors have on their plate. We have been watching the S&P 500 closely as a proxy for the broad equity market. Seven trading days ago it sliced through its 50-day moving average and ultimately held late last week at the 320 level. The drop from new highs was more than 10% and coincided with the exact level where we started the year. Since then we have seen buyers step in and push the index right back to its 50-day moving average. This is a logical place for resistance to kick in and selling to resume. This level also represents a move back up to the downward sloping trend line established when we fell from the September 2 highs.

It is noteworthy that the bounce over the past two days has occurred on decreasing volume. All these factors cause me to be skeptical of the case that the selling is over. I hope I am wrong and we can close the week back above the 50-day average, but my guess is we still need to test the 200-day moving average at 310 (SPY) before we have enough real support to move higher. Time will tell.

Earnings ultimately drive price, so it is worth discussing where we are on that front. Since the end of the second quarter, we have seen that most companies’ ability to generate profits has been severely impacted by the economic shutdown brought on by COVID. To put it simply, earnings growth has stopped and threatened to turn negative year-over-year. It is the expected growth in earnings that causes investors to pay a premium for stock. If earnings don’t rise, then investors don’t buy. This reality between earnings growth and price underpins the general disconnect between Wall Street and everyday companies. A rally to all-time highs just doesn’t make much sense given this lens. To justify prices above the February highs, investors would have to expect earnings growth above what we were seeing then. Back then, we were seeing year-over-year growth expectations approaching 10%. So, if earnings growth is flat, why would prices today move above those levels? Great question. The answer is, they won’t unless growth expectations warrant it.

Some good news is that the earnings freefall appears to have bottomed. The expectation is that growth began to resume in the third quarter. We are going to see if that expectation is correct as third quarter earnings are underway in just a few days. In all my time doing this, I don’t know that I have ever seen an earnings season as important for the overall health of the market, psychologically and otherwise. The first quarter earnings season of 2009 was huge and kick started the bull market that lasted a decade. The difference here is that in 2009 we were at the bottom with no way to go but up. Today we are at a top and have a long way to fall.

Download a PDF of this commentary at the following link:

Cabana-Weekly-Market-Commentary-September-28-2020Download
Disclaimers

June 22, 2022

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of Cabana. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq