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As COVID-19 continues to keep us isolated from one another, we are seeing two polarizing camps competing and driving market performance. In one corner, you have a large group of investors who continue to be driven by the fear of losing everything. Based on the uncertainty of how severe the long-term economic damage will be from the pandemic, this group of investors is sitting on the sidelines in cash waiting for the markets to collapse, at least once more, before they stabilize.
Most recently, we are seeing a growing group of investors being driven by a fear of missing out (FOMO). FOMO is based on optimism that businesses will reopen soon and the worst is behind us. These investors don’t want to miss out on the market’s additional upside, so they’ve come out swinging: pouring money into the markets with hopes that the markets will keep going higher and higher towards a “V” recovery curve.
This past week, the FOMO crowd saw some positive news. OPEC is working toward crude oil production cuts. Less oil supply should help stabilize the energy sector and prevent oil prices from falling further. Additionally, the Federal Reserve (the Fed) rolled out a new $2.3 trillion loan funding program for small businesses, which should help a large number of businesses survive the economic impact from COVID-19. These developments are adding fuel to what historically is a strong month for the markets.
Bestoke Investment Group recently reported that April has been the best month for the markets over the past 20 and 50 years:
So far, in April, the positive trend is continuing. The S&P 500 has already gained 8.4% in April, while the Dow is up 8.8% for the month. Additionally, both the S&P 500 and the Dow are now up over 20% from their March 23 lows. With signs that COVID-19 cases are beginning to peak in the U.S. and Europe, along with historical precedence, we can see why the FOMO crowd is so optimistic. We could see the markets continue to climb throughout April.
Now, before getting too excited about a “V-shaped” bottom, we need to keep our expectations in check and realize that this fight is far from over. Historically, in nearly every event-driven bear market (like this one), the markets tend to take an initial hit when bad news first happens, then, at the first sign of “good news,” the markets recover much of the previous losses. BUT, what happens next is the key: if the level of economic damage appears to be severe enough, the markets typically retest the previous lows. This is the final bottoming out, before any recovery in a “W” recovery curve.
That is what happened in China, and that is what we are expecting here:
“A Wave” downward: China went from all-time highs to a big drop, after news about COVID-19 hit their markets.
“B Wave” upward: China’s markets recovered 90% of its losses, after COVID-19 peaked and it appeared that their situation started to stabilize.
“C Wave” downward: China’s markets recently had a relapse, retesting previous lows, after investors were able assess the severity of the economic damage to China’s economic production.
Finally, China appears to be starting its “real” recovery. Its markets had a chance to factor in the economic hit and price stocks accordingly. China’s road to recovery is now being paved with less uncertainty about the future and a better understanding of how the virus impacted corporate profits.
It is not unreasonable to imagine the U.S. following a similar path. The S&P 500 dropped over 1,200 points from the February highs to the March 23 lows. Since that time, it has recovered more than half of those losses:
What’s still unknown is how much longer businesses will be closed or at limited capacity and how much damage has been done to corporate profits. Most S&P 500 companies have suspended earnings guidance, so, for the most part, we are still somewhat shooting in the dark.
It appears the U.S. markets could be in a “B Wave” right now (initial recovery of the 1,200-point decline). Will the markets continue towards new all-time highs, now, or will there be another downturn? We feel that it is a strong possibility that the U.S. could have a relapse/retesting of previous lows before heading to new highs. In either event, there are still great opportunities out there. If you have yet to deploy your cash reserves, we recommend dollar cost averaging into the markets in order to capture those opportunities without exposing yourself to market-timing risk.
Most of us fall somewhere between the two corners of the ring in this fight (fear of losing it all and FOMO). Maintaining a long-term perspective with a balanced portfolio of stocks, bonds, and alternative assets is a great solution for the uncertain times ahead.
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