Has the stock market bottomed? Will it retest its lows? What will the recovery look like? Investing in this market can be unsettling. It’s natural to look forward to the other side when the eventual recovery will happen.
We’ve seen a nice bounce recently, and the “bottom” could already have been made. But market bottoms usually take time and can be more of a process than an event. Important for investors to remember is that market bottoms aren’t known until months after the fact.
Is the worst behind us? We feel that the following five things need to happen for the stock market to make a bottom and begin its recovery. The good news is several may have already occurred.
Technical indicators pointing toward a bottom.
The market shifted from all-time highs to a bear market at the fastest pace in history. When the panic was palpable, certain indicators were suggesting a market “bottom” was forming. Investor sentiment, stock mutual fund outflows, and trading volume indicated the worst of the selling was behind us.
An understanding toward the breadth of the recession.
Near the onset of the outbreak, investors were trying to figure out what effect, if any, this virus would have on the economy. As the outbreak grew into a global pandemic, it was clear that a near-shutdown of economic activity would cause a recession.
With a peak-to-trough drop of nearly 34%, the market has seemed to “price in” a recession that’s consistent with past bear market drops.
Furthermore, projections about the severity of this recession are known to investors. Nearly 10 million Americans filed for unemployment in two weeks. The president of the St. Louis Federal Reserve predicts a 32% unemployment rate and analysts are projecting a double-digit GDP contraction in the second quarter. While these projections may end up being worst-case scenarios that play out far better in real life, it’s important to note that bad news is out there and is being processed by investors and market prices.
Fiscal and monetary policy responses from the government.
Policy makers have responded in a big way to the threats caused by the economic shutdown. The Federal Reserve has cut interest rates to zero and has been supplying liquidity to credit markets that were in danger of freezing.
In addition, Congress and the Trump Administration worked to enact the $2 trillion CARES Act to provide stimulus to our nation’s small businesses and workers.
Good news on the COVID-19 front.
Simply put, we feel that the market needs some positive news about the COVID-19 pandemic. Over the weekend, New York Governor, Andrew Cuomo, was upbeat on New York City’s mitigation efforts, and he tweeted on April 6th that his state’s need for hospital beds is tracking far less than initial projections. Certain hot spots are improving, and the globe is all-in on finding vaccines and therapeutics. Good news on the health crisis can translate into good news for the stock market.
Reopening of our economy.
Lastly, there needs to be an indication on how we will reopen our economy. Though mandated social distancing has slowed the spread and has likely saved lives, the longer we are shut down the harder it will be on our economy.
Of these five, the first three may already be accomplished. This is good news! If we can continue to adhere to the guidelines issued by the president and our state and local governments, we will see more good news from the health crisis and a gradual reopening of our economy.
How should we think about investing in this market? Join us for a live webinar on Wednesday, April 8th at 12pm Pacific Time as we explore “Timeless Truths for Investing Success”.
