In the Rearview or Out the Windshield?

Posted In: COVID-19 Market Update

Over the past several weeks, we have presented two possible scenarios relating to the effect of the coronavirus (COVID-19) on the economy: in one scenario, the markets retest the prior lows and form a “W”-shaped bottom, and in the other scenario, stocks recover quickly forming a “V”-shaped bottom.

 

Last week provided some unexpected hope for a possible “V”-shaped market bottom. Around the globe, the spread of COVID-19 is being reported as “under control” in almost all of the major world economies. Daily reported new cases seem to have peaked and are now trending more favorably. The U.S., which has been hit hardest by the disease, is currently following a trajectory that, just weeks ago, was regarded as a best-case scenario.

 

This means that some of the more grim predictions for this crisis now seem far less likely, and the markets are responding. The S&P 500 gained 3% last week, while the Dow climbed 2.2%. The S&P 500 has rallied 24% over the past three weeks and has made up over 50% of the 1202-point loss that followed its February peak. The Dow, meanwhile, has gained 28.5% since the market bottom.

 

Are these signs that the worst is behind us? Could it be that the March 23rd market low was the bottom? It depends on whether investors concentrate on what is in the rearview (what happened in the past) or if we focus on what’s ahead of us through the windshield (what is happening in the future).

 

Recent market movements seem positive, and investors are eager to digest good economic and crisis data, along with early rounds of corporate earnings reports. That said, any expectation of a fast return to normalcy should be met with caution. There has been a tremendous amount of economic damage inflicted by stay-at-home orders around the world. For most businesses, sales have been significantly impacted and could be slow to recover. The extent of the damage is not yet understood and, until there is a viable treatment for the virus, cannot be adequately predicted.

 

Despite the potential for significant economic damage, we must remember that the stock market is always a leading indicator, and predicts what will be next through the windshield. Although bad economic news is likely to come (and end up in the rearview mirror), it is often the case that the stock market has already priced this news into current market pricing. S&P 500 performance tends to lead/predict U.S. GDP outcomes by about six months. In other words, stocks tend to rise and recover before the economy has time to catch up. This is exactly what happened in March of 2009, during the Great Financial Crisis. Economic data was extremely poor, unemployment numbers were awful, and it looked like it was going to be a slow path to recovery, yet stocks bottomed and then rose in one of the best bull markets in history.

 

As evidence mounts that new infections have peaked, investors are now looking to the future. Although economic activity may not be at full capacity any time soon, improving conditions are certainly better than being stuck in neutral. This optimism should help bolster the markets, despite the stream of poor economic data that is set to come our way over the next few months.

 

We cannot underestimate the favorable market environment the Federal Reserve (the Fed) has created in its response to this crisis through providing liquidity, stability, and trillions in aid relief. Easier Fed policy should, at the very least, partially offset the negative impact on corporate earnings and help support stock prices.

 

Lastly, it appears that selling pressure has finally been exhausted. Market volume on “up” days has been much stronger than the volume on “down” days. This is one of the other factors we previously noted would signal the beginning of a recovery. Buying pressure exceeding selling pressure means that investors are now feeling more confident in the markets moving forward.

 

Although selloffs like yesterday remind us that there is still a possibility that the markets will retest the March lows and create a “W”-shaped bottom, the retest(s) may not reach the initial bottom. This idea rings especially true if a viable treatment for the disease is announced in the near future. We are in unprecedented times, but there are historical examples of the rapid rise in stocks over the past three weeks being more than just a “bear market rally.” When the markets recover more than 50% of losses, like they did in 1987 and in 2009, they tend to keep moving forward and never look back in the rearview mirror.

 

Only time will tell if the worst is behind us. As stewards of God’s resources, we will continue to focus diligently on what lies ahead through the windshield, while also heeding the wisdom to regularly check the rearview mirror and be mindful of what is behind us.

 

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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