What's Going on in the Markets March 28, 2020

The unprecedented market volatility continued as Friday's downside action capped off an otherwise strong week. A robust three-day bounce of about 20% from Monday's lows saw us give back roughly 1/4 of the weekly gains on Friday.

Still, in all, it was a great week for the bulls. The stock market, as measured by the S&P 500 index, gained about 10.25%, reclaiming about 1/3rd of the bear market losses incurred over the prior four weeks. This doesn't mean, however, that the bulls are out of the woods and ready to run free in the fields. Bear markets rarely end after only five weeks, especially when volatility remains as high as it currently is.

So far what we've witnessed this week seems to be classic bear market action. Whenever the markets get so far stretched to the downside, just like a rubber band, some sort of snap-back action is to be expected. Indeed, as I've described in previous postings, a "wicked rip your face off rally of 20-50%" was to be expected. So yes, we could get more upside in the short term.

What we have experienced in the markets over the past five weeks is a "waterfall" decline followed by a robust bounce that gets many investors to think that the worst may be over. Most of the time, after convincing many that it's safe to jump back in, we get a reversal of the bounce. If, in turn, the reversal plays out in traditional fashion, then the lows that were hit this past Monday will eventually be revisited and tested to see if they'll hold.

If the lows don't hold, then anyone buying into the bounce will be holding "losers" and will likely join the selling with anything they bought into the bounce and then some. If the lows do hold, then we will likely see a more durable (lasting) rally which may confirm that the worst of the decline is over for the intermediate-term. That may be the "safer" time to make more meaningful additions to your portfolio (but check with your investment advisor or talk to us).

The optimists are hoping that the massive fiscal and monetary stimulus will backstop stocks and prevent that retest from occurring, or that Monday's lows will hold. The pessimists are concerned that the uncertainty of the coronavirus and its economic consequences will keep buyers on the sidelines, and that more sellers will emerge.

The response of both the Federal Reserve and the federal government has been unprecedented. The Federal Reserve outright stated this week that it’s willing to provide unlimited monetary stimulus, announcing program after program, as its balance sheet exceeds $5 trillion for the first time. That's $5 trillion with a "T".  Yes, $5,000,000,000,000. Pause for a moment and let that number sink in. I'll wait.

Similarly, the $2 trillion stimulus package passed by Congress and signed by the President on Friday is more than double the $800 billion package passed in 2009 to ease the Great Recession. These efforts will dampen the economic fallout that has already begun to take place, but the full impact that will be realized is still largely unknown. I believe that more stimulus is going to be necessary.

The somewhat expected explosion in jobless claims on Thursday to a record 3.3 million (it had been averaging about 220,000-230,000 for many weeks) coupled with Friday's sharp drop in reported Consumer Sentiment (no surprise given what's going on in the world) indicates that the ongoing economic damage will likely be significant.

While Monday may possibly have marked an intermediate-term bottom in the market, it remains to be seen if the risks which were identified in prior posts (e.g., stock market and real estate overvaluation, low-quality corporate debt levels at a record high, yield curve inversion) will be unwound or not. The excesses that have been built up over the course of this economic cycle in terms of stock market overvaluations, inflated housing prices, and low-quality corporate debt remain in place for the most part and are clearly risks going forward. The depth and duration of this recession will be determined primarily by what happens in these key areas of vulnerability.

As we navigate through this extreme volatility, we will depend on key technical indicators to confirm whether or not Monday’s low was the bottom. Because I have serious doubts that this is the case, we used the bounce this week to reduce our overall investment allocations to stocks and exposure to riskier corporate bonds for clients. The next several weeks should provide valuable insight into whether breadth (the number of stocks going up versus the number of stocks going down) and leadership are truly stabilizing, and just how much of the economic risk is actually behind us.

While we are seeing unprecedented government support, we are also experiencing an unprecedented event that will have ramifications for every single person in the world. It would be quite foolish to believe that this monumental event can be priced into the market very quickly or easily.

At some point, there will be exceptional opportunities and they will be even better if we remain patient and wait for sustained positive price action to develop. While this extreme volatility may be good market action for very short-term stock market traders, if you're looking to build longer-term positions, it is still too early to put any substantial capital at risk.

Nibbling a little on stocks "here and there" is OK, but I recommend that you never buy a full position at once. Always ask yourself if you're comfortable holding the position and adding to it if it went down by another 25-40%. If you're not comfortable doing that, then it's too soon for you to buy because you'll likely sell at the worst possible time.

Enjoy the weekend and please stay safe. I am here to answer any questions you might have.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.