By Lewis Krauskopf and Saqib Iqbal Ahmed
(Reuters) – A dramatic rebound in US stocks amid the coronavirus pandemic confronts investors with a difficult decision: buy what may turn out to be an emerging bull market, or wait for a possible return to recent lows.
The 12% rise in the S&P 500 benchmark last week – its best weekly gain since 1974 – makes this choice even more urgent. The index has now offset about half of the losses from its recent dip, although it is still down nearly 18% from its record high on February 19.
Few investors have been able to time the market funds, which only becomes evident with hindsight. However, if history is a guide, early movers may have the advantage – if they can bear a possible roller coaster descent and go back.
Investors who bought the S&P 500 three months before its trough in each of the last nine bear markets saw an average gain of 21% a year later. Those who bought three months after the trough gained an average of 7%, according to a Reuters analysis.
And the market tends to deliver its strongest gains in the month after it hits a floor, according to a study by Goldman Sachs. The S&P 500 has posted a median return of 15% in the month following the trough of eight bear markets or near bear markets in the past 40 years.
If the current rebound continues, it could mean that the biggest gains are already in the mirror. For some investors, however, arriving late is a reasonable price to pay to worry less about the possibility of a market downturn.
“If you think you’ve hit the bottom and it continues to drop, people are really scared,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab in Austin, Texas. “And then they tend to make emotional decisions and sell some of the things they bought. “
BEAR IN THE WOODS
King Lip, chief investment strategist at Baker Avenue Wealth Management, is content to keep a much larger cash allowance than usual despite the recent rebound.
His company has started selling positions as the new coronavirus is installed worldwide. In mid-March, client portfolios generally represented 50% cash.
“We are ready to re-engage as long as we start to see more and more evidence that (coronavirus) cases are slowing down,” said Lip.
Indeed, many believe that the market has not fully taken into account the damage to the economy and to business revenues that the coronavirus has already caused: a recession is almost certain, and nearly 17 million Americans have asked unemployment benefits in the past three weeks.
BofA Global Research analysts said in a note last week that it would be “unprecedented” if the S&P 500 “did not test or even fall below” its March 23 low, based on ‘an analysis of past bear markets during recessions. Similar bear markets lasted on average about 11 months, according to their research.
The recent rebound should be viewed as “an unexpected and inorganic bear market rally,” said Nomura analysts in a report.
BELIEVE IN THE FED
Paul Nolte, who oversees some $ 100 million at Kingsview Asset Management in Chicago, said the wait strategy worked well during the 2008 financial crisis.
After shifting exposure to equity bonds in mid-2008, Nolte said it had missed the drop by more than 50% for several months, but started buying stocks in June 2009 as the markets rebounded. .
Lately, it has declined in stocks, in part due to exchange-traded funds focused on technology stocks and healthcare.
He’s not alone: investors poured $ 17.6 billion into equity-focused funds during the week for Thursday, a year-long high, according to EPFR Global.
Many have taken heart from the Federal Reserve’s unprecedented stimulus efforts – in particular the central bank’s decision to revive large-scale asset purchases in order to support markets and build investor confidence.
“The most powerful central bank in the world beats your head and tells you, ‘We won’t let this go any lower,'” said Christopher Stanton, chief investment officer at Sunrise Capital Partners LLC in San Diego.
Stanton is betting on gains in big tech companies like Apple and Google-parent Alphabet.
“I am convinced that these are the lowest,” he said.
(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; Additional reporting and writing by Ira Iosebashvili; Editing by Bernadette Baum)