Stableford Capital Insights

Stableford Market Commentary: May 2020

Stableford Capital—The Wonderful Thing About Tiggers

The wonderful thing about tiggersIs tiggers are wonderful things!Their tops are made out of rubberTheir bottoms are made out of springs!They're bouncy, trouncy, flouncy, pouncyFun, fun, fun, fun, fun!Remember Tigger’s song in Winne The Pooh? Does it remind you of the market at all? I am certain that A.A. Milne was not thinking about equity indexes when he wrote that first verse. However, it seems apropos today: Bouncy, springs, and lots of fun seem to be the order of the day in equity markets!The S&P 500 rebounded 36% off the lows in March through the end of May. This, after dropping 30% from the start of the year to the March lows. In May alone the surge was 5%. But this alone masks the real action that is taking place under the headline numbers, as lagging industries played catch up with the large-cap-tech early leaders.The intraday volatility and small-cap spikes are unprecedented. You can feel the price-insensitive algorithms behind the moves intra-day. All of this has led to the S&P 500 closing down only 6% through May (Figure 1). Wow! Did anyone envision that bounce in the depths of -30%+ (market that is, as most of our strategies were far off the lows) in March? Not a lot of hands raised out there.

Figure 1 Stableford Market Commentary May 2020

Meanwhile, while the 10 yr. US Treasury is down nearly 1.3% in yield through May, it remained largely flat during May, closing the month with a yield of 0.65% (Figure 2). This may change during June, as rates have begun to creep higher on higher growth and inflation expectations. We’ll see on inflation; revving the Fed printing press alone will not cause inflation. However, if the trade war with China continues to escalate, all the cheap goods we outsourced will most certainly increase in price should the manufacturing shift onshore.

Figure 2 Stableford Market Commentary May 2020

So, why the big equity bounce that seemingly ignores bad news from trade wars, protests, and civil unrest? Has there ever been a bigger mismatch between the stock market and what is happening on the street? Likely not, but the rise in equities is largely a continuation of the themes we’ve discussed in the past. We’ve seen the bottom in economic data, so the news is just getting better from an earnings perspective. Equities are forward-looking, pricing off future expected earnings. Right now, that trend is up, and no one knows where the top is. Furthermore, it is difficult to make the argument that things won’t be better in the future. Plus, many investors find themselves late to the party, so they are playing catch up. This in-turn drives valuations higher, which brings in the AI (artificial intelligence) / algorithm buyers who are following momentum. It becomes a vicious upward cycle, much like the trip down but with a plus sign in front.

Stableford's Positioning

So, what it Stableford’s view? We continue as cautious participants, though we’re not fully convinced. On one hand, there have been great bargains to buy (we can barely finish the research before they move up). On the other hand, there are a lot of risks ahead. Paramount among these are uncertainty around the presidential election; unemployment levels not meeting current “V” recovery expectations; further trade wars; civil unrest/protests; and now potentially higher interest rates. Politics aside, imagine what will happen to tax rate assumptions if Democrats sweep the Presidency and both houses of Congress. Recall that big bump in valuation at the end of 2017 and into 2018? Reverse it. November is not that far away.We continue to find bargains in small caps, REITs, cyclicals, and other areas. However, we balance all of this against the knowledge that much of 2021 (i.e. greater that one year ahead) earnings are already baked into the market headline earnings (not as much in these “catch up” sectors). We’ll continue to buy where we find value and jettison the more expensive names at unsustainable valuations. As always, contact us with any questions.Be well!Are you interested in making portfolio changes or getting a more in-depth analysis? Contact Stableford today by calling 480.493.2300 or simply request a free trial of our Market Blast.COMPLIMENTARY TRIAL OF THE STABLEFORD MARKET BLASTThis market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Justin Thomas
Justin C. Thomas has worked for over 15 years as a portfolio manager and analyst managing institutional assets for hedge funds and large financial institutions. Career highlights include 8 years as an equity analyst and portfolio manager at PartnerRe Asset Management, a global reinsurance company with $17 billion in assets under management, and prior to that managing a long-short equity portfolio for Citigroup’s proprietary account. Justin has also worked as an analyst at long-short hedge funds and in research for Montgomery Securities (Bank of America Securities). In addition, Justin Thomas gained operational experience while working in finance and operations at E-Stamp, a start-up in Silicon Valley. He began his career working as a CPA at KPMG. Justin has an MBA and Masters in Accounting from Northeastern University and an undergraduate degree in Economics from Tufts University.