Stocks ended their historic 11-year bull run last week after closing more than -20% lower than their all-time highs just four weeks earlier. One of the fastest bear markets ever seems to have been driven by short-term traders, rather than long-term individual investors.
Markets are volatile because investors hate uncertainty. Will COVID-19 be as bad as last year’s flu? Will it be five times as bad, 10 times as bad? No one knows. They are reacting to uncertainty and not to expectations. Although there will be economic damage from the virus, the real damage is driven by market psychology, which can change swiftly and dramatically.
Last week the Fed took action to reduce interest rates and increase bond buying – both positive moves to help reduce the economic impact of COVID-19. Lawmakers are considering a variety of aid packages that will help those most impacted such as service, retail and travel workers, as well as small businesses.
We believe stock markets could significantly recover in the second half of the year as any real economic impacts are short lived. The U.S. was in one of its strongest economic positions prior to this, and combined with the pent up demand created by the recent measures, it is likely that we will bounce back in record time.
It is important as long-term investors that we do not over react with our investments. A coronavirus recession may sound like a reason to sell, but it's not. We need to look forward with our investments, not backwards. Stocks typically begin to rise three to six months before a recovery. We believe we're already in that window. Stocks will begin to recover long before the pandemic effects begin to wane. The strongest bull markets are not built on a foundation of good news, but on a fading of bad news.
*Past performance is no guarantee of future results.