Adjusting our Playbook After the Bounce

Markets Blog

We continue to follow our Road to Recovery Playbook for guidance in assessing the market’s bottoming process.

In recent updates, we had indicated that four of the five signals were checked off. We have a sense of the severity of the recession (#2), which now we know has arrived. Analysis of the market’s technicals and investor sentiment (#4) pointed to a “washout” with indiscriminate selling and possible seller exhaustion. And we had the “shock and awe” policy response from lawmakers in Washington and the Federal Reserve (#5) to help restore confidence and cushion the economic blow. As of the late-March lows, we had believed a recession had been priced in (#3), but after the recent bounce, we have moved this back to ‘Almost There’ from ‘Already There.’

View expanded chart.

But for investors considering more equity exposure here, the biggest change since late March is the entry point. In the shorter term, the risk-reward trade-off on the S&P 500 Index is just not as attractive right now 10% above the recent lows and the worst of the crisis not yet in view.

“At the March lows, it was pretty clear to us a full-blown recession was priced in,” noted Ryan Detrick, LPL Financial Senior Market Strategist. “Now that the S&P 500 is more than 10% off the recent lows, the entry point to add equities here is not as compelling. We’d feel a lot better with more clarity on when COVID-19 might be contained in the US, but unfortunately that may still be a few weeks away.”

So, what should investors do now? Even though we don’t have clear sight into a peak in the number of COVID-19 cases yet, we continue to believe that long-term investors, where appropriate, may want to consider increasing their allocation to more equities here. We don’t know if the late-March lows will hold, but we think stocks are in the range of where an eventual durable low will be.

For more tactical and risk-tolerant investors looking for opportunities, we continue to suggest patience as the crisis develops. More clarity may come over the next few weeks—both in terms of the tragic loss of life and the duration of the economic shutdown. If new cases continue a steady upward climb, the March lows may not hold. A more attractive entry point may present itself soon. Bottoming is a process with many ups and downs along the way.



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