Eventually, the economic damage from coronavirus will be quantifiable, and that will make its way to equity prices. | Source: REUTERS/Shannon Stapleton
- History suggests the stock market crash hasn’t reached a bottom yet.
- Investor sentiment points to greed driving this rally, not fundamentals.
- The nature of the coronavirus pandemic will keep investors from seeing a clear picture of the future.
As Dow Jones Industrial Average (DJIA) futures ticked higher on Wednesday morning, investors breathed a sigh of relief. Two days of declines had many wondering whether another stock market crash was on the cards.
Despite worrying economic data and worse than expected quarterly results, bulls are soldiering on with claims that we’ve already seen the worst of this stock market downturn. But that could be dangerous thinking.
Bulls claim we’ve seen the bottom of this stock market dip, but history and logic tell us otherwise. | Source: Yahoo Finance
Past Stock Market Crashes Show Patience is a Virtue
The Fed’s unprecedented stimulus has many investors claiming that comparisons to past bear markets aren’t useful. “You can’t fight the Fed.”
But fund manager Mark Mobius offered overzealous investors some sage advice in an interview with Yahoo Finance.
The most expensive words in the world are ‘This time is different.’ I don’t think this time it’s different.
Data compiled Morningstar research director Paul D. Kaplan shows that the stock market has been suffering through a bear market (a 20% decline or more) just about every nine years.
The good news is that the market has always recovered and investors who were able to wait it out ended up back in the black. But for investors who don’t have years to wait for their investments to recover, it’s useful to consider what history says is going to happen next.
That’s where the bad news comes in. Looking at the 17 stock market crashes that Kaplan analyzed, the market tended to take about two years to reach a bottom.
In the past, the stock market has always recovered– but never quickly. | Source: Morningstar
Kaplan notes that the steep initial decline we’ve seen compares most closely to the 1929 stock market crash and the Great Depression.
But he says that the bear market caused by World War 1 and influenza is probably most relatable to the coronavirus pandemic. In those instances, it took 33 months and 114 months to reach the bottom, respectively.
The last 17 bear markets suggest stocks won’t bottom for at least a few months. | Source: Morningstar
Using the past as a guide, if the market did indeed hit its bottom on March 23, it would be the first time in history the stock market found a bottom in just a month. Is it possible we’re that lucky? Mobius doesn’t think so.
Greed Is Driving the Stock Market
Mobius isn’t the only bear out there cautioning that the worst isn’t over yet. That’s because investors have yet to fully absorb the implications of coronavirus on the economy.
The hallmark of a tapped-out bear market is investors giving up on a recovery. But the Federal Reserve’s measure of consumer sentiment shows that the majority of investors are expecting stock prices to climb higher in the wake of the pandemic.
Market sentiment shows we’re nowhere near the bottom yet. | Source: New York Fed
As the market plummeted in March, investor sentiment went up, not down. That suggests that greed is driving this rally, not fundamentals. For disciples of Warren Buffett, that’s a key sign that it isn’t the time to buy.
Don’t Count on Coronavirus
The stock market’s current enthusiasm is largely driven by hopes that the decline in coronavirus cases will help get the economy back on track. While that’s certainly a promising sign, it doesn’t necessarily mean we’re ready to snap back quickly.
Daily confirmed coronavirus cases in Singapore have suddenly started rising again, suggesting a second wave in Asia. | Source: WSJ
As we’ve seen in Asia, as soon as social distancing restrictions were eased, case numbers started to rise again. That suggests we’re going to see rolling lockdown measures for a long time to come— at least until a reliable medical intervention becomes available.
No one knows exactly what to expect in the year to come, and that makes it difficult to price equities. This earnings season, we’ve seen that coronavirus inflicted more pain than expected. Most analysts expect Q2 to look equally as disappointing, but beyond that, most firms are hesitant to make predictions.
Investors have been quick to brush off poor Q1 results, but the fact that US firms don’t have a clear path forward has yet to set in. | Source: FactSet
While the uncertainty should be weighing on investor confidence, the Fed’s massive stimulus has helped investors feel optimistic despite flying blind. That won’t last forever.
Eventually, the economic damage from coronavirus will be quantifiable, and that will make its way to equity prices.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
This article was edited by Josiah Wilmoth.