With stocks steadily rebounding from their March lows, the number of new coronavirus cases slowing and the government discussing plans to possibly reopen parts of the economy in the coming weeks, many feel that the worst is behind us.
Two veteran investors, however, warn against such optimism and believe there could be plenty of volatility ahead.
Mark Hulbert, editor of the Hulbert Digest, completed an extensive study of previous bear markets. He says he expects the March lows to be broken in the coming weeks or months.
His research shows that while the recovery from the March lows has been “explosive,” it’s not unusual. Since the establishment of the Dow Jones Industrial Average in the late 1800s, the market has rallied 38 times in a manner that’s as strong and quick as the current rally. All of those rallies occurred during the Great Depression.
Hulbert also warns that market sentiment is still too bullish for the March lows to stick.
“The usual pattern is for the final bear-market bottom to be accompanied by thoroughgoing pessimism and despair. That’s not what we’ve seen over the last couple of weeks. In fact, just the opposite is evident — eagerness to declare that the worst is now behind us.”
Is the Bottom in?
How will you know when the bottom is in? Hulbert provides this insight:
“When the bear market does finally hit its low, you are unlikely to even be asking whether the bear has breathed his last. You’re more likely at that point to have given up on equities altogether, throwing in the towel and cautioning anyone who would listen that any rally attempt is nothing but a bear-market trap to lure gullible bulls.”
Hulbert also points out that historically there have been 11 bear markets where stocks have fallen at least 37%. These drops happened from the February 2020 highs to the March lows.
He says that on average, it’s 137 days from the beginning to the end of a bear market. This would put the end of this bear market somewhere around August 7.
Alan B. Lancz, a friend and disciple of legendary investor Sir John Templeton, has a similarly bearish outlook as Hulbert. He believes that the stock market stands at a historic inflection point.
“The next 45 days may just become the most critical period in U.S. financial history,” he wrote in a newsletter published Wednesday. “While on average we may face a bear market every 10 years, this one is like no other,” he added.
Lancz most likely refers to the record surge in job losses and a shut-down economy. These are two unprecedented events without historical comparison.
He believes that the timing and the execution of its plan to reopen the economy will dictate how the country recovers from the coronavirus pandemic.
He warns that even a perfect rollout of the plan won’t lead to the sharp economic recovery that many expect.
“Even if we execute properly, the recovery will take time and a best-case scenario is a ‘U’ shaped recovery,” he wrote. “The much talked about ‘V’ shaped recovery is no longer in the equation because of the unprecedented combination of negatives with this crisis.”