Below is a copy of the note from Melinda we sent out via mail on Friday (April 17th).
We wanted to reach out and update you regarding our interpretation of the recent moves in the stock market.
At this point it appears that we are in phase 3 of a market reaction.
Phase 1 being the sell-off which occurred in the market from February 20 to March 23. As you are undoubtedly aware, the market experienced an extreme sell-off during this period, selling increased in a near panic fashion with the peak to trough decline being nearly 34%.
Phase 2 followed this move and consisted of a relief rally from the market lows experienced on March 23. From the recent market bottom, the market recovered over 20% in part due to the stimulus measures passed by Congress as well as the hopes that the virus would soon reach its peak and the economy can be reopened.
In recent days the market has experienced negative volatility as well as upside movement which indicates that we are in a 3rd phase which will be characterized by frustration/stagnation as the shutdown and social distancing requirements linger on and concerns rise regarding the long-term effects on our economy and the national debt. We believe that we will be in a trading range during this period meaning that markets will trade in a well-defined range of prices.
Given the impact of the virus and the shutdown on consumer and business spending, along with supply chain disruptions, it is apparent that we are currently in a recession. For a number of reasons however, we do not believe that we are headed into a depression. This recession will be tempered by the actions the federal government has taken in terms of monetary and fiscal stimulus as well as the social safety net of Social Security, Medicare, and Medicaid.
While originally, we had hoped for a V-shaped recovery from the market bottoms, we are now expecting that the more likely outcome will be a U-shaped recovery while we wait for the economy to re-open. While it is impossible to tell whether we will retest the recent stock market lows, a study of the last 10 recessions shows that the average recession decline in the S&P 500 has been 30.5%. As stated earlier, we recently experienced a peak to trough decline of 34%.
If history is any guide, therefore, we may have already experienced the market bottom for this recession. Although a steep recovery in the market does not appear imminent, it is also important to note that the stock market tends to anticipate events approximately 6 to 9 months before they occur. It is therefore extremely likely that the market will begin to recover well before the economy has recovered. For that reason, we continue to recommend that clients stay invested although we also believe that the coming weeks and possibly months should present very attractive buying opportunities for clients who have cash to invest.
I have been a financial advisor for over 20 years, I have witnessed the tech bubble and subsequent burst and I have managed money through the great recession. Through it all, we continue to council clients on how to best invest during these difficult times and how to continue to generate retirement income.
If you would like to review your retirement income plan or investment portfolio, please do not hesitate to reach out to us.
