The market has surged 25% since its late-March low. Is now the time to go all in again or should investors be wary?
Why is the stock market rallying?
I’m not necessarily claiming it shouldn’t be rallying, but as a thought exercise — even though stocks are down a bit as I write Monday morning — what’s your answer to why the S&P has surged 25% in three weeks as of Friday’s close?
Odds are, you might point toward how global authorities are beginning to get a handle on the growth of COVID-19 … how the financial stimulus will soon be kicking in … how there’s discussion of reopening the economy … how things could begin to get back to normal sooner than later.
All valid points.
But a follow-up question …
Do you think those points warrant this 25% rally, and that it should be sustained? In other words, does our current stock market valuation accurately reflect where stocks should be trading right now?
Keep in mind, from its all-time-high set back in mid-February …
Despite historic U.S. unemployment …
Despite the nation still being under lockdown …
Despite investors not knowing the full impact of COVID-19 on corporate earnings …
Despite 295 companies having now pulled their guidance …
Despite nearly one-third of all apartment-renters having been unable to pay April rent …
Despite the prediction from leading economists that the U.S. economy will contract by 30% from April through June …
Despite Fed Chair Powell saying the U.S. employment situation is deteriorating “with alarming speed” …
Despite IMF Managing Director Kristalina Georgieva saying “We anticipate the worst economic fallout since the Great Depression” …
Despite all that, as of Friday, the S&P was now down just 17% from its all-time-high.
Now, I’m not a bear. My portfolio has taken a massive wallop like everyone else’s, so I’m rooting for a vigorous, sustained recovery. But I’m suspicious of this 25% rally over the last few weeks, and today, we’re going to look at why you should be suspicious too
Last week, the social deprivation proved too much for my friends and me
Wearing masks and standing 10 feet apart, we met in an empty parking lot and caught up for an hour.
One of the topics that arose was the stock market. As we discussed it, one of my friends lamented that he hadn’t bought in two weeks ago when the market was much lower. He felt he’d missed the bottom, so he actually bought in halfway through last week, indicating he didn’t want to miss the rest of this rally as stocks kept pushing higher toward their mid-February levels.
Now, I have no problem with him buying in when he did. Assuming he purchased quality stocks, I believe he’s going to make great returns in the coming months and years.
But two things bothered me. First, his tone hinted at panic. He was “missing out!” and so he was chasing the rally. Second, and more troubling, though I didn’t ask for details, I got the impression he had sunk a considerable chunk of money into the market.
Now, if the markets keep rising, that’s wonderful for him. But if not, I’m concerned he’s going to feel the regret (and possibly the urge to sell due to painful losses) that’s so common to investors who chase … only to see prices fall much lower several weeks/months down the road.
And this ties us back to why I’m suspicious of the sustainability of this rally … and excited for better buying opportunities ahead.
***History suggests we’re going lower again
Stocks rarely move up or down in a straight line. In the midst of bull markets, we often see temporary bouts of painful selling. And in bear markets, we often see temporary periods of vigorous rallies.
Oaktree Capital’s Howard Marks recently put the numbers on this, looking at the rallies that took place during our last two bear markets.
What he found is that, in each bear, the first big comeback rally was followed by a sharp decline that eventually gave way to the true bottom.
Below is a graphic showing the up/down nature of the 2001 bear market:
We saw a similar pattern between late 2007 and early 2009 during the financial crisis bear market.
Should this time be any different?
“Yes, Jeff, it should. This time the bear wasn’t brought about by fundamental weakness in our economy. This time, it’s more of a natural disaster, like a hurricane. We’ve now largely weathered that damage, so a vigorous rally is warranted.”
In one sense, that argument is 100% valid. Our economy was strong. And COVID-19 does, in many ways, resemble a natural disaster.
But who’s to say we’ve passed the worst of it?
***As we noted in the Digest last week, we’re at risk of COVID-19 followed the path of the Spanish Influenza
The second wave of the 1918 Spanish Flu (which came in the fall, after the first wave hit earlier that spring) was actually deadlier than the first. It killed 195,000 Americans in October of 1918 — that was 28% of the total of 675,000 American deaths.
Some medical professionals are saying a second wave of COVID-19 is a certainty.
Dr. Janis Orlowski is the chief health care officer of the Association of American Medical Colleges. Here is an excerpt from an interview with her published last week:
I believe that we’re going to return to a semi-normal life at the end of May — Memorial Day …
But the other thing that I would say is that we have to prepare ourselves to go through a similar exercise in the fall, in the late fall.
If you take a look at the 1918-1919 influenza pandemic, and if you take a look at how coronavirus is acting, this is not just the winter and spring of 2020. Probably late November, by December, we are going to go through this again.
Does this sound like a “one-and-done” natural disaster?
It doesn’t to Minneapolis Fed President Neel Kashkari. Speaking to CBS’s Face the Nation on Sunday, he said:
“Barring some healthcare miracle” (such as an effective therapy or vaccine) “it seems we’re going to have various phases of rolling flareups” with “different parts of the economy turning back on, maybe turning back off again.”
Does today’s market price reflect going through this whole thing again in the fall? Or rolling flareups? … another round of lockdowns … another round of layoffs … another round of hits to corporate earnings … another round of missed rent payments …
Is all of that factored in?
***Beyond the parallels to the Spanish Flu, we’re now learning some COVID-19 patients are testing positive again after recovery
From Bloomberg:
The coronavirus may be “reactivating” in people who have been cured of the illness, according to Korea’s Centers for Disease Control and Prevention.
About 51 patients classed as having been cured in South Korea have tested positive again, the CDC said in a briefing on Monday. Rather than being infected again, the virus may have been reactivated in these people, given they tested positive again shortly after being released from quarantine, said Jeong Eun-kyeong, director-general of the Korean CDC.
“While we are putting more weight on reactivation as the possible cause, we are conducting a comprehensive study on this,” Jeong said. “There have been many cases when a patient during treatment will test negative one day and positive another.”
It’s not just South Korea. Fear of re-infection in recovered patients is also happening in China. There are reports that some recovered patients tested positive again — and even went on to die — after supposedly recovering and going home from the hospital.
Again, is this risk of re-infection priced into today’s market as we trade roughly 18% below all-time-highs?
***Applying a measured approach to investing today
Now, please don’t misunderstand — as noted in last week’s Digest, we’re incredibly bullish in the long-term.
And just because the stock market might go lower in the near-term doesn’t mean that today’s prices won’t make you wonderful returns in the years to come.
So, buying today isn’t a bad idea — it’s actually a great idea, as long as your investment amount is chosen thoughtfully and deliberately, based on your unique financial situation, and it considers all the unknowns before us.
Do you want to know an easy market approach that handles all of this for you?
Well, we highlighted it here in the Digest not long ago. It’s an essay from our CEO, Brian Hunt.
From Brian (annotated):
Instead of trying “time the bottom” and put all your money to work at the exact panic lows, I encourage you “chop up” your money into pieces and look to put one piece per week into the market over the next four or so months. That’s 16 pieces.
Gradually drip your money into the market. Buy a little every week or so.
If you put your money to work this way, you will not put all your money to work at the bottom. You won’t get in at the exact lows. But you also won’t put all your money to work right before the market drops 8% in a day, putting you in the hole immediately.
Instead, you’ll gradually buy in pieces. You’ll buy some of your total position near the exact lows.
You’ll buy some of your total position right before the market drops 8% in a day.
You’ll buy some near the average prices of the bottom. You’ll get a good “blended” average of the U’s prices.
At the end of the day, if I’m worrying needlessly — if the market continues to rebound to mid-February levels, then wonderful.
But historical market data on past bear markets, the nasty persistence of COVID-19, and the threat of more economic pain in front of us suggests that chasing this rally with lots of your available cash may not be the wisest move.
We’ll continue to keep you up to speed here in the Digest,
Jeff Remsburg
