When Will The Market Bottom?

Since this question is on literally everyone’s minds right now I wanted to talk through what I think that scenario might look like.

First and foremost, there is no answer to “when” the market will bottom. It might be this week, next week, or even longer. We are shutting down entire economies at once with no firm idea of when we will spin them up again. The past 11 bear markets have taken an average of 15 months to find a bottom. If you are buying right now there’s no guarantee the market won’t go lower and lower and lower but you know what? That’s always the case. Volatility is going to be heightened for awhile, expect gigantic daily moves.  After the crash of ‘87 the market bounced 15% in two days, then re-tested the low 33 days later. Every bottom is different, this one will be too. What matters right now is your risk tolerance and your investing horizon not someone else’s. Hyper focus on yourself not what you see in the news.

The Fed cut rates to zero and decided to re-engage QE to the tune of $700B. What was the markets response? More of the same, a halt down 7% and then down 12% immediately after that (as I write this we are back to “only” being down 6%). The question you might be wondering is this: “why didn’t that make stocks go up?” “It worked in the Global Financial crisis didn’t it…why not here”? The problem my friends is that world, the world of a “Fed put,” was left behind mere weeks ago. This is a medical world now not a financial world. Their intention isn’t to make stocks go up or to cure the virus, they are doing this to make sure the financial system functions thru this crisis. That the world’s most liquid market (Treasuries) continues to function and credit markets don’t freeze. The odds of recession are surging (my friends at Strategas put it at 70%) but the Fed is on the front lines fighting and will be for the foreseeable future.  

What did I mean by “this is a medical world now?” My personal opinion is that the market will start to bottom when epidemic curves begin to flatten in the Western World. Spain, France, the US, those curves are going to skyrocket as cases are discovered. Italy, which is on full lockdown right now, is further along the curve and releasing epidemic data daily. This is the new Nonfarm Payrolls, the new PMIs, the new Leading Indicators. When their curve begins to flatten we will better understand what quarantine can do to slow the spread of infection. But the data will get worse in the near term as those other nations still aren’t on full lockdown. The bottoming process will be medically driven not Fed driven. In WW2 the stock market bottomed 10 days after the Doolittle Raid (1942). It then rallied as news about the war got better. Same here, only it’s a war against a virus. The financial recovery will begin on the back slope of a curve, not once it’s all clear.

This is a unique crisis, one that will change the World forever, but also one that will teach us what kind of investor we are. It’s ok to do nothing right now, doing nothing is a decision people make all the time. Investing should never be an “all in or all out” situation, it has always been about balancing risk so you can sleep at night. We don’t own stocks for the next minute or hour or day, we own them because we believe life gets better over time. That companies and economies grow through the years even while absorbing incredible shocks like these. Optimism (think bullishness) can take losses in the short term, everyone admits that, but optimism has not taken losses in the long term.