A Hopeless Bottom

An excerpt from my article published at SeekingAlpha.com.

We just experienced one of the fastest bear market drawdowns in history and the S&P 500 was down -36% from peak to trough. Since then, we’ve also had a quick bounce of +27%. The whipsaw has everyone guessing if the stock market bottomed in March.

Of course, the answer is nobody really knows. Recent price action reminds us markets are capable of anything anytime. The best we can do is use history and data to make an educated guess.

Hoping for a bottom

Stocks are coming off of a three-week rally and big banks are calling for a “V-shaped” recovery. Morgan Stanley and Goldman Sachs both expect a strong rebound by the second half of 2020. I have my doubts, but the outlook is not unreasonable.

The current downturn was caused by self-imposed lockdowns. From that perspective “aggregate demand” wasn’t destroyed, just artificially suppressed. That could mean a violent snap-back from pent-up demand when the economy is “turned back-on.”

Meanwhile, we’re seeing some unprecedented global stimulus in the US. The Fed cut rates to zero and opened the floodgates for asset purchases while the Trump administration is committing trillions in fiscal support.

Source: Visual Capitalist

These massive, coordinated measures reflect a country determined not to go down. The raging FOMO rally of the past three weeks shows investors are buying into the quick-recovery narrative and hoping for a market bottom.

S&P 500 RETURN YTD 2020 (SPY)


Relying on the data

Hope is a powerful thing but numbers and data are more reliable.

Continue reading the full article at SeekingAlpha.com.

Victor K. Lai, CFA