The stock market broke record this year, crashing 30% in just 22 days. Fastest in history.
The rebound was quick and strong too, with Dow Jones Index staging one of the highest weekly returns in history.
The S&P 500 has recovered by 27% after crashing 34% from its peak. It is still down 16% from its 2020 peak.
The question in every investor’s head is whether this is a dead cat bounce (i.e., market would resume its downtrend eventually), or a real recovery.
We will look at various indicators to help us with the answers.
Real Recovery Argument #1 – Stock Market Goes Up Within 6 Months From the Outbreak of An Epidemic
Below is the chart compiled by Charles Schwab and Factset. On average, the MSCI World Index has done well after an epidemic occured, making 8.5% gain after 6 months on average. Only 4 occurrences the market didn’t recover over a 6-month period – HIV/AIDS, Pneumonic Plague, Zika and Ebola.
Covid-19 is in its 4th month and the market is still making a loss. There’s still 2 months to go and if history repeats, there’s a chance that the recovery is on its way.
Real Recovery Argument #2 – US Presidential Election Year Is Usually Bullish for the Stock Market
Only 4 times in the last 100 years that an U.S. Presidential Election year had negative returns in the S&P 500. And out of these 4 times, only once was a stock market crash, which was in 2008. One possible reason for such a set of good results was that the incumbent party will always want to win the election and will pull all their political clout to positively influence the economy and markets as much as possible.
Trump is going for re-election this year in Nov 2020. He had already eased the fiscal policies by authorising more spending to provide relief for those impacted by Covid-19. He has been pressuring the Fed since 2019 to cut interest rates and he has his wish now at 0%. The Fed has also since unleashed super lax monetary policies to support the economy and the financial markets. There could be a real recovery if the stimulus work out, coupled with the taming of Covid-19. Many market participants were initially pessimistic about the Quantitative Easing policies during 2008 but somehow it worked out and created one of the biggest bull runs in American stock market history.
Real Recovery Argument #3 – Signs of Covid-19 Cases Slowing Down In Worst Hit Areas
Italy and Spain had the most number of Covid-19 cases after the U.S. The good news is that the number of new cases has been on the decline for 2 weeks. If this persists, the outbreak would soon be brought under control. Tough measures can be relaxed and a large part of economic activities can gradually resume.
New York has also reported higher number of discharges from the hospitals compared to the new admissions as of 13 Apr 2020. This is also good news to the worst-hit city by Covid-19 in the U.S.
Dead Cat Bounce Argument #1 – The U.S. Unemployment Claim Was Off The Charts!
The jobless situation continued to climb in the U.S., hitting 6.65m last week, compared to a weekly average of 0.35m for the past 50 years. Over the past 4 weeks, the cumulative claims crossed 20m. The claims are expected to stay high over the next few weeks and the economic recession might be too deep for a quick recovery if this persist.
Dead Cat Bounce Argument #2 – Bad Corporate Results Are Yet To Be Released
JPMorgan just announced their first quarter results and profit has plunged by more than two-thirds, mainly due to the bank setting aside billions in reserves to anticipate loan defaults in the near future. Similarly, Wells Fargo reported an 89% drop in profits during the first quarter.
JPMorgan and Wells Fargo have their share prices declined by 2.7% and 4% respectively within a day.
Most companies have not reported their financial results during the Covid-19 period and investors are expecting more bad news to come. The questions is ‘how bad?’
Dead Cat Bounce Argument #3 – Economic Impact Expected To Be Worse Than 2008 Financial Crisis
The economy is a worrying one and everyone is wondering how we can get back on track. The International Monetary Fund (IMF) has a bleak forecast. The global GDP forecast is 30 times worse than the negative GDP growth during the 2008 Financial Crisis.
IMF forecasted the US GDP would shrink by 5.9% while Ministry of Trade & Industry (MTI) lowered Singapore’s GDP growth forecast to -4%, after a 2.2% contraction in the first quarter of 2020. The advanced economies are expected to contract more than the developing ones. Hence, we might not have experienced the trough of the economy and the worst has yet to come.
What Others Are Saying?
I did a quick poll in our Ask Dr Wealth Facebook Group and most of the members (5:1) think this is a dead cat bounce. Is the crowd right this time?
Our trainer, Robin Ho, has also voiced his bearishness as he believes the economic impact of Covid-19 is too deep to allow a quick recovery. He summed it up in one image:
EngineerInvest, whom we published his remarkable life journey last week, has already started buying stocks. He shared many useful charts in this article that could augment what I have presented here. And he said this which I agree, “[n]obody can predict the stock market. What investors should focus on is to identify great companies at a discount and to buy on “value”.”
Conclusion
Bull or bear? This topic is as divisive as politics and one can be very deeply opinionated about it that he wouldn’t be able to entertain the possibility that his views could be wrong.
I deliberately presented both sides of the arguments so that you can have a more balanced view about this issue. Anyway we will have our direction bias but it is healthy to at least hear the other side of the argument. To quote Aristotle, “it is the mark of an educated mind to be able to entertain a thought without accepting it.”
Personally I am in the ‘dead cat bounce’ camp but I don’t position my investments based on my direction bias. I am not selling my stocks because I believe they will go lower. I am also prepared to buy stocks if they hit the price I am willing to pay. This is because of the investment approach that I adopted whereby I just want to pick up good deals that will return good money in the long term.
Be it bearish or bullish, it is what you are going to do that matters, not what you think.
I’m 70% convinced we’re in a dead cat bounce. However, I’ve done the following:-
1) Held on to all my long-term positions as of end-Feb;
2) Did quite a bit of substantial buying in March;
3) Still retaining a fair amount of dry powder for when I see good values in my favourite assets again.
This bounce could last 1-2 months before dropping again, who knows??? It could also retrace up to the 61.8% Fib level, convincing everybody on the sidelines to jump in & leading to the biggest short squeeze in history … before crashing down again, who knows??
You left out FED action totally.
it is in Real Recovery Argument #2.
Watch Ray Dalio’s “How the economic machine works” and you will have your answer. Those that think that it is bullish obviously doesn’t have macroeconomics background.
One thing that most did not realise is that the data or historical events that we base out judgement on, is it substantial enough? Have we lived or experience long enough to see whether shit is coming?
Even Warren Buffett was astounded by a 4 times circuit breaker triggering in a single month of March. That was 4/5 circuit breaker he seen in his entire lifetime. He even reversed his move by selling the Delta airline stocks he bought in March.
What did this man see?
As the world change, the strategy of investing have to change as well. Value investing still? What is undervalue? What is the basis of discounted rates?
A new order is coming.
ST reported pandemics over past century usually lasted between 2-5 months but Covid-19 seems to be a more lingering one. I believe market should hold up fairly well (using S&P500 as proxy) till Nov 20 Uncle Sam election, simply because helicopter FED is the banker.
Picture should be much gloomier after Nov 20, even with vaccination is made available & can be successfully mass-produced. We should then see a temporal dead cat bounce due to pent-up economic consumption to make-up lockdown period.
After this supernova stage, we are likely going back to weak economic fundamental economics in U.S., with huge corporate debts maturity & rollover are slated In 21/22.
Personally I will run like Cinderella by Aug-Sep 20. Ain’t limping back home without money to take last bus home; )
Caveat Emptor!