We have been on more research calls and plowed through more reports in the last 30 days than possibly the last 25 years combined. The medical and financial story continues to evolve at an unprecedented pace. I want to share what we have been discussing with our research partners and the areas of concern that we need clarity on before a sustained recovery begins.
There needs to be transparency from several data points to find the bottom to the market selloff:
1. Confidence in the timing of a peak in new Covid 19 cases.
2. Visibility into the probability and severity of a recession.
3. Impact of corporate earnings and jobless claims.
Simply the hint of a promising containment effort of the Coronavirus the last two days has led to a recent 7% spike in the S&P 500. It’s far too early to celebrate that the worst is behind us, which leads us to believe we will potentially revisit the lows of March. This is a natural process as highlighted in the graph below.
We have studied the nine bear markets that have taken place since 1950 and found the S&P 500 had an average maximum bounce of about 14% before hitting a low point. Incredibly, during the tech-bubble bear market of the early 2000’s, we found 6 separate 10% bounces along the way, before ultimately hitting a low of 49.1% below the previous high. Our knowledge of historical bear markets helps us process and construct the next allocation move for the longer term.
The markets can digest bad news fairly well. Currently the problem is uncertainty; we have plenty to sift through before we can advance with predictability. If we make the assumption that the impact of this crisis may be diminishing a couple weeks from now-both in terms of the tragic loss of human life and the duration of the economic shutdown-then the S&P bottom may be in. If new cases continue a steady upward climb and markets price in a delayed recovery from more incremental damage, the March lows may not hold.
All of that said, we are confident that our year-end figures on both the economic recovery and S&P 500 index will be stronger. We also believe, while ‘all eyes’ are on stocks, segments of the bond market will actually lead the first stage of a sustained rebound.
We hope you and your family are healthy and as spirited as possible!
Jay
The opinions voiced in this material are for general information only and are 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 into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.