The attached note runs through signposts we can watch to be confident that shares have bottomed. The key points are as follows:
- While shares have rallied 15-20% from their March low and may have started a bottoming process, it’s still too early to say with confidence we have seen the low for this bear market.
- Key signposts to watch for are: signs that the virus can soon be contained (here the evidence is starting to look better); monetary & fiscal stimulus to minimise collateral damage to economies (this gets a tick); signs that collateral damage is being kept to a minimum and growth momentum is bottoming (it’s too early for this one – albeit this may partly be a lagging indicator); and technical signs of a market bottom (some tick off).
After a roughly 35% plunge from their February high point to their lows around 23rd March, global and Australian shares have had a 15-20% rally. What’s more this rally has occurred despite increasingly bleak economic data ranging from plunges in business conditions surveys or PMIs (see the next chart) to a record 10 million surge over two weeks in claims for unemployment payments in the US. Volatility remains very high but at least we are seeing up and down volatility rather than all down as was the case into mid-March.
Markets usually lead and so may have already factored in the worst. And we have seen massive fiscal and monetary stimulus over the last few weeks to match the coronavirus threat to economies. So maybe we have already seen the low for shares? Or maybe not? There is still a lot of bad news ahead regarding the virus and the economic hit and we still don’t know how long the shutdown will be for and hence it’s hard to gauge the size and duration of the economic hit, when the recovery will come and what it will be like. What’s more past bear markets have often been interrupted by strong rallies, eg, October/November 2008 saw two 19% rallies in US shares followed by the ultimate low in March 2009. This could be the case here even if we have entered into a bottoming process.
So, what should investors look for in terms of when we can expect a bottom or be at least somewhat confident that the bottom has been reached? Not that anyone will ring a bell at the bottom or that investors will be bullish at the bottom.
The following are what we are looking for:
- confidence the coronavirus can soon be contained;
- measures to minimise collateral damage to the economy;
- confidence collateral damage is being kept to a minimum & signs that growth momentum is bottoming; &
- technical signs of a market bottom.
Confidence the coronavirus will soon be contained
This is important as it will give guidance as to the duration of the shutdowns and their severity and hence the first round hit to the economy. There are several key things to watch:
- The severity of suppression measures. After containment policies (quarantining & contact follow up) failed to control the virus (South Korea may be an exception), most countries have moved on to suppression, ie social distancing. This has been made necessary to allow hospital systems to cope without a blow out in deaths as in Italy. The question is are they being applied rigoursly. The evidence suggests that they are. Of 41 major countries nearly 80% now have severe restrictions in place, including Australia.