“V” for Victory or “W” for Wait?

Wall Street has been in a positive mood the past couple of days, with several promising developments spurring the rally. On Tuesday, the Dow had its best day since 1933, surging 11%, the S&P 500 rose over 9%, and Nasdaq jumped more than 8%.  Then on Wednesday stocks continued to climb, with the Dow up another 2.39%, while the S&P gained an additional 1.15%.

Much of the positive momentum came from the finalization of a much-anticipated $2 trillion stimulus package. The bill is designed to help the U.S. economy recover from the financial impact of the COVID-19.  The specific implementation details of the fiscal package are pending, but it is expected to have:

• $350 billion in small business loans.
• $500 billion for distressed companies, such as airlines and cruise lines.
• $75 billion for hospitals to help them manage the rush of COVID-19-stricken patients.
• $250 billion for direct payments to Americans in the form of stimulus checks.

Medical science continues to provide hope, as well. Gilead Sciences (GILD) has started experimental treatment of its drug, Remdesivir: one of the more promising treatments for COVID-19. The drug is now in clinical trials, with the FDA giving it the “orphan drug” designation. Preliminary results from the clinical trials are expected sometime in April.

Additionally, China announced that it is going to lift the massive quarantine and transportation lockdown on the city of Wuhan on April 8th. This is where the infection first broke out.  By virtually all accounts, the virus in China appears to have been contained, with new infections in the Hubei province falling to zero on March 19^th.  Of course, as we’ve mentioned, the political, social and geographic situations in the United States are much different than those of these Chinese provinces, but the news certainly fuels hope for “flattening the curve,” here.

Overall, it looks like things are moving in the right direction, but we cannot get ahead of ourselves.  There is no cure for the virus yet, many of the country’s economic engines are still shut down, and we really don’t have a complete picture on how severe and how long the economic damage will be.  We do not believe the worst is behind us just yet.

In New York City, the pandemic is almost as bad as anywhere in the world.  COVID-19 cases and death counts are still rising.  We expect things to remain volatile for at least a few more weeks.  Typically, when you have a bear market or correction, there are “V-shaped” or “W-shaped” bottoms.  Remember, “bottoming” is usually a process and not a one day event.

“V” for Victory?

Back in 2018, during the last correction, the S&P 500 fell nearly 20% due to rising interest rate fears and concerns about a global economic slowdown from the trade wars with China.  Stocks fell strongly over a three-month period, but bottomed on December 24^th.  Stocks quickly recovered at the end of 2018 into 2019 over a short three-month period:

Souce: StockCharts.com

There was a fast “V shaped” bottom and a fast recovery.  A victory for investors!

“W” for Wait?

Sometimes we must wait for stability. Given the severity of the current economic damaged created by COVID-19 shutdowns, it is far less likely we will see a recovery as quickly as we did last year. The recovery from the December 2018 crash was quick, because the economic impact was far less severe. Commerce was impacted in 2018-19, but it didn’t come to a grinding halt like today. We didn’t have factories, schools, business, travel, and events being shut down back then.

Because the global response to contain COVID-19 has been so wide and so long, there is significant economic damage and we should be braced for even more damage in the foreseeable future.  The $2 trillion stimulus should help ease the burden, but it will not erase all of the damage, and the euphoria in the markets will likely wane if a cure or treatment does not appear soon.

It is our belief that we are more likely to see a “W-shaped” bottom than a “V-shaped” bottom, at this point. In the wake of the financial crisis of 2007 to 2009, there was a “W shaped” bottom that took the markets several months to find solid footing:

Source: StockCharts.com

Markets put in a low in October 2018, started to recover some, but then had a “retest” of the previous lows before they finally bottomed in March 2009. Investors had to “wait” before enough people felt confident enough to begin the journey toward a full recovery. It took a while for a bottom to be found, but once it did, the market advanced quickly!

Today, it is more reasonable to expect a “W” bottom like we saw back in 2008-9.  The economic damage from COVID-19 will take many months to work through. We need warmer weather, businesses to reopen, or even a proven cure or treatment plan before the worst is behind us.  This could take months for the market to bottom and then begin its full recovery process.

We don’t know where the bottom is, but we are expecting more market volatility in the weeks ahead. Unless your financial goals and objectives have changed, your asset allocation should remain the same. Making changes in times of high volatility is almost always a recipe for disaster.

The S&P 500 rose over 400% from the March 2009 low to the March 2020 high. From time to time, we experience scary volatility and bear markets (decline of 20% or more from a peak). But once the crisis subsides and fears diminish, the next twelve months consistently produce strong results:

• After Black Monday in 1987, stocks rose 21.4%
• After the Gulf War ended in 1990, stocks gained 29.1%
• After the Asian Financial Crisis of 1998, stocks increased by 27.9%
• After the tech bubble crash ended in 2002, stocks grew by 33.7%
• After the financial crisis ended in 2009, stocks catapulted by 68.6%
• After the fallout from U.S. credit downgrade in 2011, stocks advanced by 32%
• After the trade war in 2018, stocks climbed 37.1%

Source: Blackrock

Long-term investors should be aware that once the markets stabilize, above average returns often follow. Now could be the best buying opportunity since the 2008 financial crisis. Corrections and bear markets create panic, which most often transfers money from fearful hands to those who have faith in the future.

There’s no way to know when the markets will change course. Over the past twenty years, 24 of the 25 worst trading days were within one month of the 25 best trading days. That makes it quite tricky to time the best versus the worst days. Don’t let this short-term event cause you to mortgage your future or miss out on the opportunities ahead.

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