Has the Market Bottomed?
The month of March made history with multiple record movements. Currently, the market is divided. On one hand, investors are cheering on the rally since the end of March, with key players such as Bill Ackman piling in cheap stocks in his portfolios. On the other hand, a substantial amount of investors are cautious and constantly reminded of the “bull trap” as seen in the GFC in 2008. Notable investors in this school of thought include Warren Buffet, who recently sold an extensive amount of stock to build up cash reserves.
Who is right and who is wrong? In short, only time will tell, but let us explore the supporting evidence for both perspectives.
Option 1: Markets have bottomed
Since the peak of the stock market this year, the US index has declined by 33% before rebounding. This extreme movement in such a short period is unseen of, leading investors to believe that the worst outcome of the COVID-19 pandemic has been priced in. A few institutions such as Goldman Sachs foresee that the public should be able to adapt to higher economic activity in the midst of this through safety parameters such as wearing mask/gloves, higher frequency of office cleaning and improved testing/contact tracing. The usage of mask significantly reduces infection probability rate, with the contagion probability dropping to 1.5% if both COVID-19 carriers and non-carriers are wearing a mask, according to the CDC. (However, that might not be entirely the truth as we’ve seen on a recent post by Reuters.)
The role of central banks around the world is also key in determining the timing and speed of an economic recovery. Since the start of the pandemic, the Feds have thrown in close to $10 trillion, a number not seen before, to aid the American economy. Similar actions are seen in other central banks globally. This greatly softened the blow to the economy with small businesses, affected sectors and the unemployed provided with substantial assistance during this period. We might also look to China as a leading indicator of the eventual economic recovery. Economic activity in China has rebounded since February, with its industrial production leading the path of recovery. With countries such as the US, Austria and Germany slowly reopening their economies, we could see a similar trajectory.
Option 2: Markets have not bottomed
There are good reasons for certain investors to be on the cautious side. Many are anxious that once the stimulus package effects wear off, there would be no brakes on the ride downhill. This is especially prominent in light of a growing risk of second infection wave in countries that start to ease restrictions. A few countries such as South Korea, Germany and Japan showed a slight uptick of infection cases post reopening its economy. However, it is still too early to say whether the rise in infection cases will translate to a second outbreak.
Until a tested vaccine is manufactured on a large scale, it is difficult to properly forecast the trajectory of recovery. Until then, we can only move one step at a time.