Tim Holland, CFA, Senior Vice President, Global Investment Strategist
We can’t comprehend why the ‘70s remain such a maligned decade. Sure, there was Watergate and Stagflation and a host of other national ills, but there was also disco, Welcome Back Kotter, and bell bottoms. And as we wait on the overdue return of bell bottoms to a position of fashion prominence, our attention turns to a more important, and potentially more timely, bottom – a V bottom in the stock market.
As discussed in prior blog posts, one prism through which investors can view both the market and capital allocation is technical analysis, which said simply, is the effort to ascertain future return patterns for risk assets based on prior return patterns. As such, technicians pay close attention to factors such as price momentum and moving averages, including whether the security or index of interest is trading above or below said average, which could be the point of price support or price resistance. Yes, technical analysis can be confusing!
So, when the S&P 500 Index sold off nearly 20% last year (see black line in chart below), many technicians predicted grim days ahead for the market as the benchmark for US equities was both trading meaningfully below its 50 day and 200 day moving averages (see green and red lines, respectively, below) and markets rarely experience a V bottom – a sharp correction followed by a short rebound.
In technical parlance, the market needed time to repair the damage done to it during the late 2018 pullback. Well, with the S&P 500 rallying 19% off its December low, we may just be in the midst of that often discussed, but seldom seen V bottom. And, while Brinker Capital does consider short-term technical factors such as momentum when making our asset allocation decisions, see the Brinker Capital Market Barometer below, we believe it is economic fundamentals, interest rates, and earnings that drive equities over the longer term, and on those fronts, we still see more good news than bad.
Chart source: FactSet