How do you know when you’ve hit bottom? For several years we have been expecting a “correction” in the market, to return stocks to more reasonable prices relative to company earnings. Of course, no one predicted the terrible events that made it happen.
While the health of those close to us remains our top priority, as investors, we also must try to assess the economic and market impacts. The economy has officially entered a recession, and the damage to economic growth and corporate profits – though temporary – will be significant. Government stimulus across the world may mitigate the impact. Aggressive containment measures will “flatten the curve” and save lives, yet may also lengthen the period of stagnation. The most critical element will be the timing and effectiveness of vaccines and treatments. When those arrive, economists suggest the potential for a “U-shaped” recovery, indicating a sharper, faster rebound than in economically-driven recessions like 2008. Nevertheless, it is tough to see the other side from where we sit today.
That said, there is some consensus around signals that may predict when the market will bottom out.
1. Confidence in the timing of a peak in new COVID-19 cases in the U.S. MONITORING
2. Visibility into the probable severity of a U.S. Recession ALMOST THERE
3. Markets have priced in a U.S. Recession ALREADY THERE
4. Sentiment and technical analysis indicate fewer sellers remaining ALREADY THERE
5. Policy responses have been sufficient to restore confidence ALMOST THERE
Once these indicators become clear, it becomes easier to predict when the market inflection point could take place, when opportunities will emerge, and when recovery can get underway.
If you want to read more, LPL Research has done a good job of describing these indicators.
If you would like to discuss further, please email or call me.
I hope you are doing ok with sheltering in place, staying healthy, and not going crazy.