Bear Market Rally or New Bull Run?
 In Wealth Management
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As a result of the coronavirus pandemic, late winter and spring of 2020 have been anything but settled on many fronts, including the economy and financial markets. As an investment advisor and wealth manager, I sometimes feel like I have whiplash from watching incredibly volatile financial markets this spring – I am pretty sure I have a lot of company!

And quite honestly, it is hard to tell if we are witnessing the grumblings of a bear market, the roaring of a bull market, or a dueling between the two. Both types of market conditions reflect a complex interplay of current and forward-looking investor sentiment and the state of the economy. Both can have profound effects on your portfolio’s worth.

Bull markets are generally typified by a strong economy, high employment levels, consumer spending, and increasing stock prices. In contrast, a bear market refers to one that is decline, typically with decreases of 20% of more from its recent all-time high. Bear markets are often associated with negative market sentiment, a slowing economy, and rising unemployment. Falling consumer spending leads to a decline in business profits, which in turn leads to reduced demand for company stocks and falling stock prices.

In addition to bull and bear markets, investors themselves can be described as bullish or bearish. This reflects how they may feel about the market and what trends they see on the horizon.

What is important to remember is that labelling a market as a bear, a bull, or flat usually require evaluating its performance over the longer-term, rather than just the market’s response to a particular event. Also important…over long time horizons, the stock market as a whole has tended to yield positive returns.

As you can see in the chart below, in late February the arrival of the coronavirus pandemic on the shores of the United States caused investors to sell securities in anticipation of economic hardship. As infection rates started soaring and communities and states began shutting down their local economies, this sell-off started accelerating. During March, major US stock indices careened into bear market territory, with NASDAQ, S&P500, the Dow Jones Industrial Average (DJIA) falling about 30%, 34%, and 37%, respectively, by the time they reached their market lows on March 23rd, 2020.

Source: Fidelity market charts (NSDAQ, DJIA, S&P500, SPY ETF). Accessed June 2, 2020

While it has been a pretty bumpy ride along the way, since that low on March 23rdall three indices have gone up significantly to where we are today, June 2; albeit, each is still off from their 2020 all-time highs. Until recently, much of the recent upward momentum in the market was driven by a limited number of stocks, particularly large cap technology, which are relatively unaffected by (or benefit from) the stay-at-home and work-from home orders.

This all has some investors scratching their heads. Fiscal and monetary policies, massive stimulus packages, hope for effective vaccines and therapies, as well as partial re-opening of some state economies has buoyed investor enthusiasm that the economic speed bump will be quickly resolved.

However, on the other side of the coin, over 40 million Americans have filed for unemployment, nearly 110,000 have died, the possibility of a second wave of infections looms, and consumer spending (which accounts for 2/3 of the US economy) fell nearly 14% in April. While fewer private payroll jobs were shed in May than expected, it is still murky whether recent job losses will return or if some are permanently gone. All-in-all, a number of people are concerned about the pace of economic recovery and the risk of a prolonged recession.

As a result, many are wrestling with the question of “Is the price rebound in the capital markets due to recovery and an impending bull market run or is this just a bear market rally?”.

Bear market rallies are large stock market bounces that occur during a longer and deeper downward trend in stock valuations. They reflect hope that the worst is over, markets are headed back up, recovery is in the works, and a fresh bull market is potentially on the way. Over the last couple decades, there have been five bear market rallies, occurring during the two recent recessions (2000-03 and 2008-09), when the market ultimately reached lower price levels.

However, bear market rallies can be tricky to read and trade as it is can be hard to tell if it is a rally vs a recovery; and if it is a rally, knowing how long it is going to last as well as what news will trigger the next sell-off. Often times, financial markets retest the lows on the heels of a bear market rally. As such, many in the financial world caution investors from getting caught up in the reactive and emotional trading that can happen when there are strong short-term market moves like this.

Instead, during times like this, investors are likely better served by thoughtful assessment of their portfolio positions, suitable matching of risk to risk profiles and goals, patience, and long-term investment horizons.

Part of achieving this is having a solid, individualized financial plan in place, sticking with it, and revising as needed with life stages and changes. Another part is expecting a degree of uncertainty at times and being able to thoughtfully and strategically adapt to the unexpected, rather than reacting out of emotion. And lastly, as financial advisors and wealth managers, we believe building thoughtful and collaborative relationships with our clients is key to navigating the good as well as rough times.

At Sapling Wealth Management, we specialize in individualized financial advice and wealth management as well as being an investment adviser for small business 401(k) plans. If you would like to discuss how our services may fit into your life, feel free to give us a call.

 

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