4/13/2020
It’s possible, but it’s probably wise to not count on it. We’ve seen a remarkably quick and dramatic plunge and subsequent recovery in recent weeks. This consisted of the S&P 500 falling -34% from its peak on Feb. 19, to a low point on Mar. 23, before recovering by 25% since—for a net decline of ‘only’ -18%.
Over the years, it’s been rare for bouts of market volatility to be quick and simple affairs. While drawdowns can occur quickly, and can be followed by rebounds, it’s also possible for underlying pessimism to rear its head again as challenging conditions persist, and see an initial (or even lower) bottom revisited. The average -20% or more bear market since the 1920s took 8 months to occur, with 3.5 years needed to return to prior highs.
The bear markets of the early 1960s, early 1980s, and early 2000s all featured ‘double-bottoms,’ so to speak. This is more of a technical analysis term, referring to technical support levels where investors have apparently found a point of maximum pessimism and capitulation, which is often tested several times before improvement. With the coronavirus appearing relatively quickly onto the global scene, with few historical pandemic precedents, news flow is fluid and the negative impact on the economy could be with us for several quarters. Policymakers have already begun discussing ‘re-opening’ parts of or entire economies, which has inspired market sentiment as it would contain the amount of overall damage to economic growth. But, if it is not done carefully, continued virus flare-ups in select regions could be disruptive for months to come as longer-term efforts for therapeutics and a vaccine come together.
It’s important to not become complacent, and reassess that one’s current positioning is appropriate no matter the weeks and months ahead. This is important for potential volatility on the downside, if conditions don’t improve as quickly as markets hope. As importantly, it could also help avoid missing critical upside, since news on the medical or economic front could potentially be received very positively by global financial markets.