Rolling Recessions in a Bull Market – Part 2

Last week, we highlighted the path of the current bull market since the Great Financial Crisis ended in March 2009. There have been moments of anxiety and periods of consolidation and corrections. We highlighted two periods (January 2010 to October 2011 and May 2014 to February 2016) when the S&P 500 traded sideways for 20+ months and suffered four pullbacks (-12% to -19%).

Last week, we also looked at a couple of sectors (energy and financials) that experienced longer and more serious weakness and stress. The energy and financial sectors were the first ones that came to mind as they were the biggest losers – they are not alone. Below is a chart of the drawdowns of all 11 S&P 500 sectors.

This chart highlights the stress in 2011 and in 2015-2016 for many sectors and the extreme pressure on energy over the past three years. The table below shows the sector drawdowns by maximum drawdown, date and weighting in the S&P 500 index.

Remarkably, the S&P 500 did not drop great than 20% in 2011 with the broad weakness and again in 2015-2016 when the S&P 500 recorded seven consecutive quarters of year-over-year earnings declines between Q3 2014 and Q2 2016 (clearly an earnings recession). One of the health care sub-sectors to note is biotech which after charging ahead +582% off the March 2009 lows through July 2015, then retreated -39%. Biotech is clawing back and has bounced off the lows in 2016, but remains -21% from peak.


Kyler’s Report

Where Are We Now?

One of my favorite financial thinkers, Howard Marks, always likes to ask the question “Where are we now?” as it relates to the current investing climate.  It is always difficult to exactly time markets, but observing that things are generally frothy might signal that you should proceed with caution in your investments and act a little more defensively. On the other hand, seeing that investors are generally fearful about current conditions might mean that valuations are lower and there might be good opportunities for long-term investment.

So, where are we now? Marks advocates looking at two important factors, one quantitative and one qualitative.  Quantitatively, how do valuations across risk assets such as high-yield bonds, foreign bonds, stocks, and real estate look? Are investors demanding lots of extra yield from risky borrowers in order to fund loans?

Here are high yield bond spreads:

As you can see, yield spreads are at 10-year lows. Furthermore, you don’t need to look far to see cap rates on commercial buildings heading down, and stocks are expensive compared to historical values on any relevant valuation basis.  In short, investors aren’t getting paid good premiums to invest across risk markets.

On the qualitative side, the relevant question to ask is how are investors feeling? Are most investors looking towards a strong future or depressed about the present? Are they asking tough due diligence questions in order to fund deals, or are they gladly throwing money at anything? Are they chasing markets up or concerned about the downside?

Two recent articles tell me that investors are generally in the euphoric, no due diligence mode.  This one highlights some of the excesses in the foreign bond market, and this one shows how much lenders are willing to put up with while still making loans.

To me, both quantitatively and qualitatively, most asset classes look a little stretched – valuations are generally high and investors seem euphoric and unquestioning. For long-term investors, this kind of environment suggests that you should conduct your affairs with caution. When you’re thinking defensively, the key is to focus on not making mistakes instead of trying to hit home runs.


Give Us A Call Today

As we approach 2018 and consider adjusting investment allocations for the New Year, we continue to be bullish and remain watchful for the next rolling recession. We invite you to give us a call at (415) 249-6337, visit or email us at if you have questions about how we can assist you in managing your investment accounts.

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Jeffrey Sweeney