Crescent Park & Recreation – Large Moves, Low VIX

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Dear Partners and Friends,

It has been a notably difficult environment for equities in 2022. Inflation continues to run high globally (see below) and interest rates have been raised at the last two FOMC meetings by 25 and 50 bps, respectively. There are more rate hikes forecast for this year and no real consensus on whether these rate hikes will be enough to ultimately tame inflation.

Persistent inflation, rising interest rates, the risk of recession, ongoing conflict in Ukraine, and the potential for further COVID lockdowns in China are combining to create a genuine challenge for markets. This month’s email is heavier on charts than articles as I found a lot of good data to share. In times like these, we find it helpful to maintain a long-term perspective.

 

 

I. Historical Context For Equity Markets

After the first two weeks of May, I was curious how the magnitude of recent moves measured up to history. In particular, while the daily moves have been large, there really hasn’t been a corresponding spike in volatility as measured by the VIX. As the charts below illustrate, the S&P 500 hit a new 52-week low late last week. Over the last ten years, markets have mostly bottomed out within a few weeks of reaching new 12 month-lows, but in 2000 and 2008, the S&P 500 fell a further 50% and 40%, respectively. We typically see higher spikes in the VIX in periods like these which some say we need to see as an indicator of market capitulation.

 

 

The following chart shows the percentage of S&P 500 stocks which are now below their 50-day moving average price. As you can see, the S&P 500 is in the “Oversold Zone”, but not the “Extreme Oversold Zone” as was the case in 2002, 2008, 2011, 2018, and 2020. Nonetheless, we believe there are some companies today which look very attractive on a 3-5 year basis. Again, this should work to the advantage of longer duration approaches.

 

 

II. What about Bonds?

As an equity manager, we don’t typically dedicate real estate in our mailer to bonds, but these charts were noteworthy. The US bond market is currently further below its 200-day moving average than at any time since 1989. Further, bonds are on course for their biggest calendar year loss since 1920. A rising interest rate environment is generally not good for bonds and we haven’t really seen a sustained rising rate environment for decades.

 

 

III. Are Workers Really Coming Back to the Office?

While the economy has been reopening over the last year, office workers have not necessarily returned as quickly as anticipated. Kastle Systems (“Kastle”) is a leading provider of property technology solutions for commercial real estate, multi-family residential, global enterprises, educational institutions and critical government facilities. Kastle provides data on “back to work” initiatives as they have customers in nearly 2,600 buildings in 138 cities. The following table from Kastle shows the in-person activities as a % of activities over the last couple of (the “Kastle Back to Work Barometer”). As you can see, entertainment, travel, and dining have largely returned to pre-pandemic levels. In contrast, the office worker recovery has petered out. We believe some of these labor changes are secular which could have a long-term negative impact on office REITS.

 

 

IV. Target on its Back

And finally, the following chart shows the daily % change in Target’s stock price since it became a public company. On May 18, 2022, Target’s stock price fell almost 25% making it the company’s second largest daily stock price decline in history. The last time it fell more than 25% (i.e., -33%) was on October 19, 1987.

 

 

All the best,
Pete

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