By Andy Willms, President & CEO
This week’s sell-off has led to renewed suggestions that the recent rally was nothing more than the dreaded dead cat bounce. (“Dead cat bounce” is jargon stock traders use to refer to a temporary rally in the midst of a prolonged bear market.)
Prior to this week, the stock market had been on a tear since it bottoming out on March 23rd:
· As of last Friday, the stock market had risen by nearly 50% since then.
· The 5-year annual return for the S&P 500 on March 23rd was 3.3%. The 5-year annual return for the S&P 500 through this past Friday was over 11.1%.
· On Tuesday, the Nasdaq Composite Index broke above 10,000 for the first time as Amazon and Apple hit record highs.
Mr. Market did an about face this week, with all of the major indexes falling precipitously On Thursday alone. The Dow alone dropped nearly 7%.
The recent rally and this week’s sell-off begs the question: Are we still in still in the midst of a new bull market, or was the rally just a head fake? As usual, there are rational arguments that can be made in support of either point of view.
The rally will resume:
Reasons to believe that this week’s sell-off was a temporary setback, and that the market will continue to move higher in the months ahead, include:
· The economy is reopening, people are returning to work, and consumers are returning to the marketplace.
· The Federal Reserve’s massive stimulus programs injected trillions of dollars into the economy, and much of this money is finding its way into the stock market.
· The spread of Covid-19 is slowing in the U.S., and for the most part, the growth in new cases is largely due to much greater testing, not a dreaded second wave.
· The pharmaceutical industry is making progress on Covid-19 treatments and vaccines much faster than all but the most-optimistic experts had believed was possible.
· Interest rates are at or near all-time lows, giving equities a big competitive advantage in the battle for investor dollars.
The recent recovery was a bear market rally:
As I mentioned in earlier posts, there are a number of reasons to believe the stock market’s recovery over the last few weeks was destined to be temporary.
· We don’t have any readily available, proven treatments or vaccines for Covid-19, and reopening the economy and ongoing social protests raises the risk of a second wave.
· The requirements imposed by The Payroll Protection Act to retain employees are coming to an end. As a result, the declines in unemployment may be short-lived.
· While there has been a lot of talk about another round of stimulus spending, the rancor in Washington makes this far from certain.
· The ungodly deficits resulting from the efforts to boost the economy may lead to serious challenges down the road.
· The November elections could add to investor fears and further disrupt the economy.
· Valuations are at or near the record levels that led to the bear market predictions that preceded the pandemic
Only time will tell as to which camp is right. However, as this week so clearly demonstrated, when the stock market rises quickly, the risk of investing in stocks rises as well.