WEEKLY E-MAIL

30 March 2020

HAVE INVESTMENT MARKETS BOTTOMED?

By Paul Nicol

Out of nowhere market returns were more upbeat last week despite terrible economic data and an acceleration in COVID-19 cases. The US S&P 500 had its strongest three-day rally since 1931, after dropping 34% from its peak. At one-point last week the US market rallied 20% from its low, but on Friday gave back some of the week’s gains.

Last week’s “bear market rally” was predominantly driven by the extended negotiations over US fiscal stimulus which were finally concluded on Friday, more intensive lock downs to curb the growth number in COVID-19 cases and valuations looking far more enticing that they did in the early months of 2020.

Source: ITESS, MPW

As a by-product of last week’s rally the question we are now being regularly asked – have we now seen the bottom of this aggressive sell down in share markets?

The obvious and most honest answer is “we have no idea – who really knows”? But, we can look at previous bear markets as a guide to see what to expect.

Most often bear markets have a false dawn. While it encouraging that markets are not ignoring more positive developments like the very substantial stimulus packages rolled out by policy makers around the world, we are cautious of last weeks share marker rally knowing that the economic data points going forward are going to paint a very bleak picture of the world going into a virtual standstill, with significant increases in unemployment numbers the major focus point.

The share market cycle in a bear market can generally be broken down into three distinct stages. Phase one is the destruction stage when all assets fall at once and nothing is immune. Phase two is the consolidation phase where the severity of the downturn is better understood and there are policy actions in place to limit the damage. And finally, phase three is the recovery stage where expectations have been reset lower but markets begin to pre-empt an improving outlook.

Source: ITESS, MPW

Historically, the catalyst for moving from the destruction to the consolidation phase is adequate policy support or that sellers have been exhausted and markets have become outright cheap. This seems to have occurred. However, in the consolidation phase markets are also able to get a better handle on the implications of a shock without these risks once again driving another round of aggressive selling. In this instance, the implications of the shock of COVID-19 are assessing the likely duration and reach of those that will get the virus, how credit markets function going forward (due to likely credit downgrades and defaults) and how confidence might impact future variables coming out of the downturn such as investment, employment and spending.

At present, we believe it is too early to confidently predict the global virus picture. As such we cannot confidently predict we have reached the consolidation phase of markets and we continue to urge caution.

Paul Nicol

Managing Partner
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017, 2018 & 2019
Authorised Representative No. 230876

If you have any questions or comments, please email me at paul@gfmwealth.com.au

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