The last few market commentary notes we put out were during the midst of the market panic. I thought I would put out some more commentary to let you know what we are thinking now that we have seen some recovery in the market.
The S&P500 dropped nearly 34% in just 33 days through the current low on March 23rd. As mentioned in our previous comments, this was the fastest move in market history from a market high. When you get that much panic, you often form a V-bottom created by a quick reversal back up. This is why we have encouraged not to sell into the panic and try to think six months out.
The market has fully recovered from the eleven bear markets since World War II in an average of about twenty-four months. An event driven bear market, like this one, usually recovers much quicker. The faster the down move often correlates to the speed of the recovery.
I am asked a lot whether we have seen the bottom. Was March 23rd as bad as it will get? Though no one knows for sure, we have some pretty good evidence that the bottom is in. First, at the low of the market, even the safe haven investments of U.S. Treasuries and Gold were not working. As the market was falling, interest rates were rising and gold was falling at the same time. In other words, it looked as if “the baby was being thrown out with the bath water”. This level of panic often marks the bottom. Second, there has been ten times since 1929 that the market went down by over 30%. Every time, the quick reversal recovered at least half of the loss; the market never made a new low. Obviously, there are no guarantees, but we believe this bear market bottom was likely March 23rd.
Keep in mind that the market is forward looking. It is a leading indicator that looks six to twelve months into the future. We believe the market is already looking beyond the economic damage the coronavirus has caused. There will be more bad news in front of us, but the market should continue to look beyond the crisis. The market usually starts to recover as much as twelve months before economic activity is restored.
Though it is nice to see the market recover and to see your account values increase, we still believe volatility will continue for a while. After a strong reflex recovery like we have seen thus far, it is not unusual for the market to need to test the bottom again. Due to the speed of the sell off and the level of panic, we do not believe the market needs to retest the absolute lows. However, we do expect to see some profit taking as the market establishes a higher low on the chart. We have already witnessed this as the market lost ground in early April after a week of strong gains, before resuming the current upward trend.
We will be watching for any short-term weakness that develops to again, establish a higher low. In other words, begin the stair step pattern of higher highs and higher lows as the recovery continues over time. So far, the technical signs are encouraging as this pattern seems to be developing. If another higher low and high are established, we would consider that more of an “all clear” signal.
Though we expect more volatility during this uncertain time, if we can just put our thoughts six months down the road, we do think we will fully recover from this bear market in a reasonable amount of time. Here is an interesting thought: we are currently about 25% off the market low. The textbook would suggest that a move of 20% off the lows establishes a new bull market…?
Stay safe and stay healthy…
Royal Fund Management