Why The Market May Fall Further – AND – Signs Of A Bottom
Here’s some notes and ideas for Wednesday 1 April 2020 during these rapidly changing and challenging times. This is not financial advice nor is it making any specific recommendations. It is educational only. Please speak to your financial advisor for specific advice. This article is split into two main parts:
- Why The Market May Fall Further – we take a look at the current economic situation and then a look at history to show us how and why a market can continue to drop to new lows
- Signs Of A Market Bottom – One day this shall pass and at that time understanding how to recognise the signs of a market bottom can be a lucrative skill to have under your belt. For example, some of the worlds wealthiest investors like Warren Buffett made their fortunes when everyone else was selling.
Why The Market May Fall More…
The ASX rallied hard yesterday – up a record 7% as the government announced a $130 Billion relief package aimed at helping keep people in jobs during the worst phase of the crisis.
Is the massive stimulus package announced here and in the US enough?
Businesses are closed and the economy is effectively shut down – this is now unlike anything we have ever seen before. I am personally now getting very cautious – even though the market is rallying, is this just a suckers relief rally?
There are 4 basic scenarios many are talking about now:
- That we have already seen the lows and there is a V-shaped recovery from here
- That we have already seen the lows, but stocks will take a long time to recover eg typical bear markets run for 1-2 years
- A big new “panic sell-off” is coming with the share market hitting new lows, maybe down another 25% or more – a distinct possibility as no-one knows what is about to happen over the coming months with both the pandemic and the economic effects
- A full blown severe and long depression
I am personally planning for each of the 4 scenarios.
This pandemic is growing exponentially and yes the news is getting worse.
The USA will easily hit over a million corona cases and from there who knows? It’s a bit like the 1918 flu epidemic – except we do have modern medicine with the promise of vaccines and solutions in sight.
If you are going to invest only use money that you are prepared to leave in the marketplace potentially for a long time, and you can afford to risk as the market could would crash more and stay down for much longer than first anticipated.
Here’s what we are about to see come out soon…
To be blunt – some of the worst economic numbers in history.
Morgan Stanley is predicting the US will lose some 30% of its economic growth. It’s now generally accepted by economists that US GDP will contract by an annualized rate of somewhere between 15% and 25% in the second quarter of 2020 (some economists have estimated that the contraction in 2Q 2020 could be as severe as -50%). This would represent the greatest quarterly contraction in US economic history, by far.
Unemployment is predicted to go as high as 30%!
Make no mistake, these are seriously sombre predictions and if they turn out true, then its not going to be good.
You Do Need To Prepare Yourself For These Situations
Why? Because the forthcoming economic and financial crisis may be more severe, by far, than any in US economic history since the Great Depression. There may be a second big leg down in the share market coming. It may drop far below the lows established on March 20th.
What can history show us?
It is very typical in bear markets to see sudden rises in share market which suckers everyone back in thinking things are ok and then it really starts to drop – sometimes, way below the previous lows. It is smart to be prepared for this scenario (you should speak to your financial advisor).
We are in highly unusual times because of 2 big factors:
- We have real fear and panic occurring due to a pandemic
- Nobody can escape the fact that our streets and cities are eerily empty. The economy has clearly shut down. This is not “just on paper” – the unemployment lines are real and immediate and highly visible to absolutely everyone.
Risk Of Another Depression?
Let’s remember history – the most severe bear market we have seen was the Great Depression. This played out in TWO major price cycles – the first one took a year to hit its lows in December 1929 – then a new “false” bull market started because investors thought the crisis would be short lived. However, by April 1930 the market turned down again and the “real” bear market hit – a decline of more than 80% over the next 2 years!
We are in uncharted waters now. The dramatic speed at which this one has hit us is unprecedented – there is a chance a recovery may be surprisingly quick but there is equally a chance this could go much deeper and longer than first thought. You can’t ignore the fundamentals of completely closing down entire economies for 2 to 6 months.
No one can predict the outcome, but its more on the side of not being good.
The big question is: will the Government bailouts work? That’s the big one and unknown at this stage. They have in the past. This time it is unknown. I think the share market will make up its mind for us over the coming 1-6-12 months and tell us loud and clear.
Do we read and take on board the most negative outlooks or do we look for the best case scenarios?
Like I said above, I think it’s sensible to prepare for the worst, hope for the best and plan for all outcomes.
Here is another interesting article on this topic written by Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist for AMP Capital: https://www.ampcapital.com/au/en/insights-hub/articles/2020/march/is-coronavirus-driving-a-recession-depression-or-an-economic-hit
Interestingly Dr Oliver suggests there are big differences compared to the Great Depression and a long drawn out global downturn is not inevitable. Furthermore he says that growth could rebound quickly once the virus is under control.
One good thing to always keep in mind is, no matter how long and deep this recession is, one day it will end!
There will be a market bottom at some point. And this of course is where those who are prepared can make a lot of money buying up excellent assets at cheap prices – just like Warren Buffett does.
There will undoubtedly be once in a life time bargains out there at the market bottom. So it can be a lucrative skill to recognise the signs of a market bottom. Please note that it is very difficult to precisely time a market bottom but below I have listed several signs that can give us clues.
Practical Things To Watch For Signs Of A Market Bottom:
Watch what happens in China Watch the Corona cases – have they stopped? Apparently there has been no new growth in case in the last 2 weeks. The president of China has already announced the epidemic is already over. There are many online articles now about people and the country starting to return to work and normal. What to believe? I like to watch the Chinese stock market for clues and the traffic reports – they tell a story.
You can check out the Shanghai SSE180 Major Stock index here: https://finance.yahoo.com/chart/^SSE180/ – It is currently not showing a big decline like the US and is still holding above 2018 levels
You can check out live traffic stats for yourself here: https://www.tomtom.com/en_gb/traffic-index/shanghai-traffic
Watch what happens in Italy The Corona pandemic hit Italy well before the US so a decline in cases there may show us in advance when or what we can expect in the US and here.
Watch what happens in California California lead the US in quarantine so it should be the first state to see cases topping out and could give us a good indication the epidemic is slowing.
Watch Government Bailouts Even as a severe a health and economic crises we are in, massive economic stimulus packages can have an effect and stave off severe recessions – that’s what they are designed to do.
Watch global share markets especially SPY500 or the DOW This shows you what the big money is doing/thinking. Yes, it can get irrational both in panic and greed BUT it does tend to be a leading indicator – meaning if it starts to recover (and doesn’t crash back down) then this be a positive thing. Its useful to notice when the everyday headlines are screaming sell-panic and if the market does the opposite – pay attention. Ie if the market continually ignores bad news = could be good
You can check out the SPY500 index chart here: https://finance.yahoo.com/chart/^GSPC/
Watch The BIG Buyers Namely, Warren Buffett. If he steps in buys up a large part of say a major bank or airline company = big signal of confidence to the rest of the market. Warren Buffett has already said he’s ‘ready to pounce on this stock market massacre’ with $128 billion in cash.
Watch The US Dollar Its technical but basically with interest rates at all time lows the US dollar should be weak. Instead its really strong! (probably because of a flight to safety). As things start to normalise, the dollar should weaken = good for US companies.
Watch The VIX Its technical but basically it’s a measure of market volatility. Its at extreme levels at moment. Once volatility starts to decline this can give a clue that a stronger stock market may start.
Watch Specific Sectors and Stocks The strongest stocks during a recession are often the ones that lead out on the other side and go up the most – makes sense since they have proven themselves. At some point a market runs out of sellers and does a final capitulation. A final capitulation of market leaders like current tech stocks such as apple, google, Microsoft and amazon, can be a sign a the bear market is ending.
Here’s one thing you can plan for – one day this will pass!
Things will start to return to normal once the pandemic crisis slows and ends.
The pandemic will abate, vaccines will be developed.
People will come back to work.
Businesses will open again (eg look at China, its already happening)
The streets will be full again.
Things will have changed a bit:
More people may be online
More people will realise they can work from home, run their business online
Life will go on.
So whilst you are at home, start preparing yourself for the future when things get back to normal.
Speak with your financial planner and advisors – come up with a plan to protect your wealth as best as possible.
Start thinking about what industries will continue and thrive throughout all this and position yourself accordingly
Start looking for opportunities
Everything is negotiable and cheaper – including online advertising!
Good writers to help you create content are now cheaper and in great abundance
Lots more people want to work from home – for realistic prices
Tidy up everything you do – in your daily routines, your home, your personal habits, your online business, put in processes and systems – iron them out, get ready for the recovery
Reps, reps, reps – practise and perfect key skills eg online skills
Be prepared for bargain assets – train yourself to recognise these and know what they look like and their true value, the swoop in when they are cents in the dollar or way undervalued eg shares and websites
Take low risk business options like building websites (rather than buy) as its just your time involved.
Lots of businesses will realise they need to go online – you can help them with this
And as life returns to normal remember that there will be plenty of people, family and charities who may need an extra hand so consider a plan for giving back when you are able.
Stay safe, healthy and positive
Kind regards, Matt Raad
Thought For The Day
“The government doesn’t set the timeline, the virus does”
– Dr. Antony Fauci, the Director of the National Institute of Allergy and Infectious Diseases.