Steve Tuttle, Chief Investment Strategists of Signer Financial Management, discusses the important developments in the financial markets. We expect market volatility to continue, but identify opportunities in the future.
Markets showing signs of stability, even during higher volatility now
Recent market action suggests the big fear, a total collapse of the economy and stock market. However, we think this has been dismissed. A bottoming process in the stock markets may begin as markets are normalizing, volatility measures declining, and observed manufacturing contraction.
Furthermore, history tells us that markets go through bottoming processes and that these processes take time. For example, if we review the S&P 500 from 2008-2009, we can understand how there were multiple periods of strong gains followed by more downturns. Essentially, the markets experienced periods of large gyration. This is something to keep in mind as an indicator for more volatility ahead through the bottoming process.
The bad and good news | What will April bring?
The major concerns lie in the level of infection rates of COVID-19, depressing macro data, Q1 earnings announcements, and recent rally in stock markets. The good news is, potential positives are that COVID-19 infections could peak late April 2020. This brings on newfound momentum with reopening schedules for the economy, execution of central bank support, and potential end of the oil price war.
“If we look at the bright side to any sell-off,” as Steve explains, “is that there is a correlation between market valuations and forward or expected earnings. The graphic from Research Affiliates shows that as the market sells off, the valuation of the market improves.” As a result, the expected returns of the market looking out improve as well.
What long-term investors should keep in mind
So what makes the most sense for investors? Market volatility drives many investors to abandon their asset allocations and time the market. This is where out strategies come into play. Low volatility stock strategies have historically delivered market-like returns with less risk.
To conclude, be mindful of continued risks ahead but consider opportunities that this steep selloff is presenting in stock and credit valuation. Overall, we still have to be careful about chasing stocks after this rally. As always, patience and discipline is key to be successful in the stock market.
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