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When Will This Be Over? Part II

It’s amazing what can happen in a short period of time.  Last week I was writing about a recent trip to Colorado and the seemingly “business as usual” feel that I had on the trip.  Only a few days later, more and more things closed, including the place where I had just visited.  And only a few days after that, the U.S. is in a virtual lockdown.  Here in North Carolina, as in many states, schools are closed for at least two weeks and bars and restaurants were ordered closed.  The ban on group functions that started at greater than 250 people went to 100 with “suggestions” for 50 and now 10.  The markets have continued to gyrate wildly despite a surprise move by the Federal Reserve on Sunday to cut short-term interest rates by a full 1% (pretty much the last 1% they had to give), and promises by lawmakers to do “whatever it takes” to minimize the economic damage brought about by the mandated closing of just about everything.  This includes sending checks to people of as much as $2,000 under a certain income level.

In the commentary from last week, I gave some bigger picture scenarios of the types of bear markets we have seen in history, the average drawdown (loss) of market value seen in them, and how long it takes to get back to previous highs.  To read that click here.  This week I want to give you some thoughts on where we might go from here to get to a bottom.  This is only using history as a guide and much of history is being re-written with this event-driven (Coronavirus) major disruption to the markets and our lives in general.  Much of what I will report to you was taken from an exclusive call that HighTower facilitated with Strategas, one of the top independent research firms in the world.  This is a bit technical, but I know that some readers want the details while others don’t.  If you don’t, skip to the summary.

Historically speaking, to get to a major market bottom requires the following:

  • Extreme oversold conditions
  • Apocalyptic sentiment
  • Fewer individual stocks making new lows
  • Falling single stock correlations
  • Very strong breadth on the other side of the decline
  • Emergence of risk-seeking leadership
  • Positive divergence from credit markets
  • Meaningful steepening of the yield curve

Some of the above have been met, others haven’t, and it’s changing daily.  Number 1 is pretty much a given as the market has never gone down this far this fast.  Never!  Number 2 is close to being met and, in the past when it’s as close as it is now, the market bottomed in a couple occasions a few months later but at levels not much lower than when the sentiment changed.  In those instances, the S&P was up double digits a year later.

Breadth has been a problem in the days when the markets went higher, so that condition hasn’t been met.  Risk-seeking leadership hasn’t happened yet either as high beta stocks are underperforming low beta stocks and momentum stocks continue to outperform.  This will need to change to match historical bottoms.  Credit markets have been in a tailspin along with stocks, but stocks will have to break out from that to signify we’ve reached the end of the cycle.  The yield curve can change very quickly, and it has steepened recently, but market bottoms have historically been reached at steeper levels than where we are right now.

Summary

As hard as it is to believe, the market will likely bottom before the virus spread gets better.  This phenomenon has been seen over and over.  During a recession (which is still a fairly strong possibility unless the “curve is flattened” quickly so Americans can get back to business and the virus is mostly affecting only the most vulnerable) the market often bottoms when things still look very bleak (think March 2009).  From a historical standpoint, the typical conditions of a bottom have not all been met.  This could change quickly, and we will keep you updated.  We continue to be pleased with the resilience of our diversified portfolios despite the massive losses in global stocks.  Thankfully, not even one of you (our clients) has sold out and some are actually adding to their portfolios.  If you can stomach the shorter-term volatility and take a long-term perspective, this may be a good opportunity to increase stock exposure.  We’re not trying to gamble or time the exact bottom, yet the opportunity to enhance long-term returns by buying at discounts could be a good one. Once again, please call us if you want to discuss your particular situation.

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