Stocks are bottoming, but it is a process rather than an event and will therefore take some time. This according to a recent article in Financial Advisor magazine that argues, “The reactions of governments and individuals are likely to push the world into a recession.”
The article outlines the following 10 themes to consider as we navigate through current conditions:
- Most of the panic stage in the stock market is “in the rearview mirror,” leaving the market poised for what the article describes as “relief rallies” as the bottoming process continues.
- “A U.S. and global recession looks likely.” The current level of shutdowns and quarantines is unprecedented outside of wartime. “As daily activity around the world is reduced, economic growth will slow to a crawl. We peg the odds of a recession at more than 50% as we see deflation, supply and demand stocks, rising unemployment and falling wage growth.”
- Credit crisis caused by the plunge in oil prices: “Falling oil prices caused a spike in credit spreads, particularly within the energy sector. We expect to see ratings agency downgrades, which could cause further liquidity issues.”
- Market liquidity is under pressure: Corporate credit markets have suffered from both the pandemic and the drop in oil prices. “In our view, bond market liquidity would need to improve before we could call a bottom for equities and other risk assets.”
- “More fiscal and monetary stimulus needed.” The level of aid currently contemplated doesn’t “address the likely sharp economic demand shock.” The article argues that “an impactful stimulus package would probably cost between $300 and $500 billion and would include a combination of tax rebates, payroll tax cuts, employee retention credits, small business loans and industry-specific relief for hard-hit sectors.”
- Strength of the banking sector a plus: Banks remain well capitalized, “maintaining their strongest balance sheets in several decades. The financial system is significantly more resilient“ than it was during the financial crisis.
- Trump’s reelection prospects have dampened since the coronavirus outbreak: According to PredictIt, the probably has fallen from 59% at the market peak to 46%.
- Indicators show that a market bottoming process is beginning: “Market bottoms are a process, not an event. This will take some time.”
- Stock prices could start to climb this year: “While we think volatility will remain elevated, we expect markets to move sideways with both selloff and rally attempts.”
- “Now is not the time to abandon long-term investment plans.” The article advises investors to dollar-cost-average into and out of the market. “In particular,” it says, “we see significant price advantages in value styles, which could be poised to pop when markets eventually recover.”