Broker Check

A Bottoming Process Begins: 6 Ideas to Consider

| March 20, 2020


• We think stocks are in the process of bottoming, but that process will take some time. A decline in new cases, falling credit spreads, rising Treasury yields and oil prices and stable weekly jobless claims are potential signals of when the market might turn higher.

• This was a week for the history books: The coronavirus, oil price collapse, liquidity pressures and rising quarantines, travel bans and business and school closures caused widespread panic, pushing stocks into a bear market. 

6 Ideas To Consider

1. The sharp drop in stock prices was unprecedented, and we think most of the panic stage is in the rearview mirror. Stocks then dropped more than 20% in just 16 trading days, marking the fastest bear market in history.1 This will take some time, but we think the bulk of the panic selling has already occurred, setting the stage for relief rallies as an extended bottoming process begins.

2. A U.S. and global recession looks likely. The world has never witnessed such widespread shutdowns and quarantines outside of wartime. As daily activity around the world is reduced, economic growth will slow to a crawl. We expect the economy will experience sharp, but hopefully short-lived slowdown.

3. More fiscal and monetary stimulus is needed. 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. For its part, the Fed has already cut rates to zero, injected massive liquidity into the markets and will be expanding and broadening its asset-purchase programs.

4. The strength of the banking sector is a positive for the U.S. economy. The ultimate depth of the economic damage remains unknown, but bank stocks are already discounting a grim outcome. Banks remain well capitalized, however, maintaining their strongest balance sheets in several decades. The financial system is significantly more resilient than during the financial crisis a decade ago.

5. The ongoing turmoil has hurt President Trump’s reelection prospects. According to the PredictIt predictions market, Donald Trump’s reelection probability was 59% at the market peak, but has since fallen to 46%. Prior to the coronavirus, Republicans hoped to retake the House of Representatives. Now, Democrats are eying the possibility of taking both the White House and Senate.

6. More volatility is likely, but stock prices could start to climb this year. While we think volatility will remain elevated, we expect markets to move more sideways with both selloffs and rally attempts.

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Source: Excerpts from article by Robert. C Doll; 1 Bloomberg, Morningstar & FactSet