Markets have experienced a strong recovery from the lows of March 23rd, currently regaining back half of what was lost since the highs of February 19th. Investors continue to question whether this is simply a bear market rally which could eventually find opportunities to fall back and retest those lows. This week, the markets will be entering the Q1 corporate earnings season which will be sure to reflect some of the lost profits in March. If investors are able to look past Q1 earnings, they will still have to face Q2 earnings which will ultimately capture the full extent of this self-induced economic shutdown. The uncertainty around corporate earnings, the potential for a setback in ‘flattening the curve’, and the indefinite duration of business closures provide more than enough fodder for a resumption of downside market volatility.

Our team has always been advocates of active rebalancing and buying and selling stocks in stages. However, in moments like these, both buyers and sellers can feel paralyzed by the uncertainty.   Therefore, we believe it is important for investors to recognize the potential ‘enemies’ and road-blocks to their investment decision making. We highlight these three potential enemies:

Covid-19 Narrative

Clearly, the one common enemy that we all face is Covid-19. It has brought the world and markets to its’ knees. The rapidly rising number of global cases is still cause for concern, however, it is important to note that in the past two weeks the scary and sobering headlines of Covid-19 have been met with the competition of more positive and hopeful headlines. We are now beginning to read about: New York ‘flattening the curve’, continued decrease in European Covid-19 cases, increased fiscal stimulus and extended relief from the Fed. At the end of last week, the discussion has even shifted to the timeline and process for re-opening the economy. Although this is a deservingly hotly debated topic, the sheer mention of the possibility that Major League Baseball could start their season in May would have seemed impossible just a few weeks ago. By no means are these providing an all-clear for investors to dive back into the market, however, the narrative is beginning to shift, and not conceding to this fact could lead investors to be paralyzed by the negative sentiment that was ever so prevalent.

History

After such a quick bounce higher from the bottom, some investors may feel discouraged for having recently sold their equities or feel they had missed a buying opportunity. As mentioned in the previous blog ‘Name the Bear’, depending on the type of bear market, the recovery period has ranged from 1.25 years (event-driven bear markets) to 9.25 years (structural bear markets). Emotions can run extremely high, however, investors should not make buying decisions in haste. Although there is no comparable bear market of this nature, the history of market recoveries cautions investors to chase a new rapidly rising market. That said, even if this were to be a sustained recovery, it would be unusual for the market to not periodically provide better buying opportunities along the way.

The Fed

Through all investment cycles, the saying goes "Don’t Fight the Fed". This implies that if the government wants to boost or cool an economy, they likely will be successful in doing so. Hence, investors should position portfolios to match the Fed’s intended trajectory for the economy. Currently, it is apparent which direction the Fed is aiming for. On April 8th, the Fed expanded its efforts with a $2.3 trillion injection into businesses and ailing municipal governments. To our surprise, this $2.3 trillion reflects the Fed lending against just $195 billion of the $454 billion appropriated to it by the CARES Act. Hence, should the Fed need to utilize the full amount, the total injection could expand beyond $5 trillion. Furthermore, the $2 trillion CARES Act that was passed by Congress is currently in discussion to be expanded. In totality, the Fed and Government are willing to go to unprecedented levels to backstop a reeling US economy. Although in the short term there is a considerable amount of risk in the successful implementation of these programs, long-term investors have always found it difficult to make an enemy of the Fed.

In conclusion, investors should recognize the emotions and biases that they may be faced with in both buying and selling in this environment. Working with an advisor to review portfolio positioning and potential buying targets is recommended. Equipping oneself with an implementation plan and contingency plan will provide the focus that is needed during these uncertain times.