Coronavirus Quick Take April 21
April 21, 2020
Welcome to another day of Coronavirus Quick Takes. Today we’ll tackle a question we’re hearing a lot lately: Will the stock market take another tumble toward the March 23 lows?
Since equities hit their near-term bottom on March 23, the global All Country World Index has rebounded by +23.0% as of April 20, putting the index only 18.3% below its February all-time high. The recovery—though not as rapid as the record-breaking decline that preceded it—has nonetheless been impressive. Thus it’s natural to ask: Can it last?
Bear markets generally go through several stages, and the current one appears typical so far, except that everything is moving way faster than usual. The stage we went through from mid-February to late March, when nearly all stocks—and many other types of assets—were dropping like stones, ended in what is often called a “selling climax” on March 23. This is the point of maximum panic, when investors raise cash by selling whatever they can, often completely ignoring price. A selling climax is typically accompanied by a surge in the VIX, or “fear” gauge, to its bear market high.
March 23 was true to form, with all the hallmarks of panic selling, including a surge in the VIX to 85, a level not seen since October 24, 2008, when a similar selling climax took the VIX to 89. Even though the VIX was slightly higher in 2008, back then it took 7 weeks to go from 20 to 89. This year, that same move took only 17 trading days.
After the panic stage, we typically enjoy a rebound, although not always as strong as the one we just had. Then virtually every bear market enters a final stage: a more measured decline that ends in what is often called “despair.” This stage is generally not accompanied by massive panic selling. Not surprisingly, the VIX never reaches the same heights as during the panic stage.
We saw this behavior in 2002–2003 and again in 2008–2009. In 2002, which was the end of the dot-com bust, stocks had their panic bottom in late July. The secondary bottom was about 10 weeks later at almost the exact same level. There was a then third bottom, almost 5 months later in March of 2003, that was a bit higher than the first two, before stocks finally soared over +40% over the next year.
In 2008, the October panic bottom was followed by a weak rebound, then a secondary bottom about a month later, and finally the “despair” bottom in March 2009 nearly 4 months after that. Interestingly, although the S&P 500 index at the March bottom was below the level of the previous two, the majority of stocks were higher. This is because the largest stocks, which had held up better until then, finally succumbed to selling at the same time that investors were buying other stocks. (This also illustrates how index prices don’t always tell the full story.)
Will we see something similar this time? History suggests we will, but there are a number of unique features to this bear market that make history an imperfect guide. First, it is event driven rather than caused by Federal Reserve tightening or a financial system crisis. Second, the accompanying recession was triggered by government directive rather than business or consumer behavior. Third, the amount and speed of fiscal and monetary stimulus are the largest and fastest ever seen.
The uniqueness of the current market environment suggests that we may not see a “despair” bottom, and stock prices may never challenge their March 23 lows. On the other hand, you should be prepared for the possibility that stocks could tumble significantly once (or twice) again before the final rebound takes us into a new bull market.
We would argue, however, that asking whether or not stock prices will fall again before finally recovering is the wrong question, and that the path of equity prices during the remainder of this downturn is of little relevance. There should be no doubt in your mind that both the economy and the markets will eventually recover and that stock prices will reach new highs. What’s most important is whether your portfolio is positioned in a way that enables you to reach your financial goals and also allows you to sleep at night.
Being greedy—by trying to increase your return—or being fearful—by trying to reduce the discomfort of falling portfolio values—are both doomed to failure if they involve timing the market. Even if you are positioned for lower prices and the market complies, will you be ready (and willing) to buy when that happens? Or will you miss the bottom entirely, waiting for better prices that never materialize?
Don’t try to game the market, as the odds are stacked against you. Rather, realize that the future is largely unknowable and that no matter how hard we try to predict it, the market will surprise us. Live your life day by day but let the market fluctuate in peace.
We’ll continue to write Coronavirus Quick Takes periodically during the pandemic. Please feel free to comment and ask any questions that come up.
The KCS Wealth Investment Team
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