After taking plenty of punches and getting knocked to the canvas in the last month, the market finally came back swinging. Three successive days of gains has shown life in the old fighter, refusing to stay down. Is this the reversal signal we’ve all looked for? Have we seen the bottom?
Talk of an eventual market recovery has been alphabet soup-like. Will the trajectory be V-, U-, L- or W-shaped? Recessionary recoveries have historically been W-shaped – bouncing from the bottom, retesting lows and finally ascending over the longer-term. That would suggest this week has seen a bear market rally and that this upswing is temporary and prices are not yet stabilized. True or not, we’re likely close to a market bottom (average peak-to-trough market drops in a recession are -35%, a number we reached Monday). Markets dislike uncertainty, but foundations for establishing a bottom have been constructed. We now have monetary stimulus, fiscal relief and improved economic and virus data, measures the market clearly likes . If events don’t play out as the market prices for perfection, additional downward momentum is likely. Nonetheless, this week’s surge shows panic selling fading and investors buying (again).
After a decade of unprecedented growth, a trigger was the only thing missing for market conditions ripe for a major pullback. The COVID-19 crisis has been the primary cause, and the oil crisis has certainly been a secondary factor, responsible for much of the recent credit market issues. Low interest rates have enabled weak businesses to continue leveraging operations, and much of the recent sell-off has been forced de-leveraging by businesses affected by a halting economy. Owning the second- and third-best companies in an industry will probably not be the optimal strategy for managing through this downturn.
The Tompkins Financial Advisors’ investment strategies, constructed from lessons learned by our professionals over decades of market cycles, seem particularly appropriate right now. Quality predominates, where solid balance sheets, low debt, seasoned management teams, abundance of cash, innovation and competitive advantages abound. These are the qualities that will propel the winners. These are the traits that help explain why assets have retained more value throughout this market decline. Defense wins championships, and losing less now means more dollars available to participate in an eventual recovery.
These are unsettling times, but we will recover. Protecting your assets and enabling them to grow with proper risk controls is more crucial now than ever. Continue to look beyond any short-term worries to the sun that will rise over the horizon.