The Bull and Bear Tug of War
Last weeks market performance was head scratching. Tuesday, Wednesday, and Thursday the markets were up a combined 20%, which technically took us out of the bear market. But they were book-ended by big down days on Monday and Friday.
The 3 day mid-week gain of 20% was definitely a welcome sight, but there is still a way to go to get back to where we were. If you have something valued at $1000 and it drops 50% to $500. If it then gains 50% it would seem like you would get to the $1000. A 50% drop coupled with a 50% gain should cancel each other out. But after it drops 50% to $500 a 50% gain would only get it back to $750 still 25% less than the $1000 that it started out as.
Towards the end of the week I was getting questions around if Monday was the bottom and we’re on the road to recovery. Things do seem a little more opportunistic, but we have to be careful of market “fake-outs.” Here are some times in history where we entered a bear market, came out of the bear market, only to go back down to a new low
The market is looking for three things right now
- A clear path on how we are going to beat the virus. There are a lot of positive things going on with the virus on the front of vaccine development and treatments. But the number of cases in the US continues to rise and shows no sign of plateauing yet. Here is a chart that shows a daily look at coronavirus tests, cases, hospitalizations, and deaths
2. Financial Support to Individuals and Businesses
There was a big step towards this with the passing of the CARES Act on Friday. I’m going through the 800+ page bill now and will publish an analysis on it mid-week. Here are some details on the support for individuals and small businesses. With so much uncertainty around the economic impact of the virus the question remains if the stimulus package will be enough.
3. Ample liquidity in the financial and banking system
The Fed has committed to providing unlimited support behind the financial system including
- Cutting Interest Rates to Zero
- Resuming massive purchases of Securities, otherwise known as Quantitative Easing
- Lending to Securities Firms
- Encouraging Banks to Lend
- Backstopping money market funds
We still have a ways to go, but there is some optimism after this week.
Navigating the Coronavirus Crisis
On the latest episode of the podcast I cover
- What’s happening with the virus, the markets, and the economic impact?
- How does this compare to 2008?
- What is the path forward?