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The Hedge Monster – The Market Roller Coaster

From Lee Sherbakoff,
The Nalls Sherbakoff Group, LLC.

Dear Friends,

Last November the magazine Travel and Leisure published “The World’s Tallest, Fastest, Loopiest Roller Coasters.” Regardless of Travel and Leisure’s opinion of theme park roller coasters, there has never been a more thrilling, gut wrenching, and heart pounding roller coaster than the U. S. stock market beginning in 2009 through today.

After tormenting investors with the 2000 Tech Bubble and the 2007 Global Financial Crises, the virtual market roller coaster, “Hedge Monster,” pulled out of 11 Wall Street, New York, NY, on March 9, 2009. The S&P 500 stood at 677 and had a Price-to-Earnings Ratio (P/E ratio) of 10.3.  This means investors were willing to pay $10.30 for $1.00 of earnings. The market P/E ratio of 10.3 still remains one of the lowest P/E ratios of the last 25 years.  Way back in March of 2009, stocks were cheap. (Technically, the P/E ratio is a company’s price per share divided by the company’s earnings per share.  Given the calculus, a lower P/E ratio would indicate better value than a company with a higher P/E ratio.)

Starting out with such a low P/E ratio, investors began to buy stocks in earnest.  As stock values rose, the Hedge Monster went up, up, up, clickety-clack, clickety-clack, yet it wasn’t without some drama along the way:

  • July 2010, Flash crash, BP Oil spill, market down 16.0%
  • October 2011, U.S. down grade, European stress, market down 19.4%
  • August 2015, Global slow down fears, China uncertainty, market down 12.4%
  • February 2016, U. S. recession fears, China uncertainty, market down 13.3%
  • December 2018, rising interest rates, trade policy uncertainty, market down 19.8%

None of these foreshocks over the last 11 years would compare to the loop-the-loop the Hedge Monster roller coaster has performed the first half of this year.

The S&P 500 set a new record high on February 19, 2020, at 3,386 with a P/E ratio of 19.0.  Then as Hedge Monster is over the top, it comes racing down as investors hold on as best they can and bottoms out on March 23, 2020, at 2,237, down 34%.  The fastest 30%+ drop ever.

But wait, there’s more.  After bottoming out in March, the ride’s not over yet.  But, some investors are not feeling well and decide to get off the Hedge Monster.  With a hindsight bias they think to themselves that they have always hated roller coasters and they should never have not gotten on the Hedge Monster. Other investors say that they have always liked roller coasters, but now are scared and think the Hedge Monster is too big and fast for them. “It’s just too risky,” they think.  They decide they like the Ferris Wheel better.

The Hedge Monster bottoms out and up, up, up, clickety-clack, clickety-clack starts to scale the wall of worry and gains over 40%.  That was the largest and fastest 50-day rally since the S&P 500 moved to 500 stocks in 1957.

How will the markets perform over the next 50 days?  Next quarter? Next year?  We don’t know.  Nobody knows.  We are in trying times. We do know this, however, there will be volatility in the markets.  Hedge Monster will do what it always does, go up and go down.  The market will be the market.

With respect to our trying times, all of us at The Nalls Sherbakoff Group hope and pray for our country and the world as we deal with the COVID pandemic, shuttered but recovering economy, and the contagion of racism and inequality. We hope and pray that we can all come together to combat racism, develop economic opportunities, and advance thoughtful and effective policing policies and practices.

Stay safe and stay well.

The Nalls Sherbakoff Group, LLC

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.