Most of what I read suggests we’re experiencing a Bear Market rally, and that it will be short-lived. A very respected strategist friend of mind put it this way:
It remains our view that stock markets will return to test the March 23 lows within the next several weeks before a sustained new bull market begins.
He has studied bear markets for the past 40 years and most experience the ‘double-bottom.’ Despite his near term expectation of a correction, he remains bullish for the rest of this year and especially 2021. This is where we differ in terms of our outlook (although I admit he’s much more qualified than I am).
I’ve been around for most of those forty years and have always marveled at how agonizingly long these episodes last. We are an impatient and short-sighted species and tend to expect things to happen (in our favor) quickly, and our memories are distorted by the same biases. Fact is, few of these more serious market disruptions are over quickly.
It takes time for expectations (or sentiment) to adjust to the new reality. Evidence of this is the current tendency for the media (talking heads on business television) to begin talking about ‘recovery’ every day the markets are up. It’s also evidenced by the sudden ‘risk-on’ when COVID-19 cases seem to slowdown, as if the massive disruption in the global economy will ease with the flattening of the coronavirus curve instantaneously. The economy is like a huge ocean going vessel – changing its direction will require much patience.
Expectations still need to adjust, although the process is beginning on Main Street if not in the financial markets yet:
WASHINGTON, D.C. (April 7, 2020) — The NFIB Small Business Optimism Index fell 8.1 points in March to 96.4, the largest monthly decline in the survey’s history. Nine of the 10 Index components declined, which is evidence that economic disruptions are escalating on Main Street as small businesses struggle to keep their doors open. The small business sector is anticipating and bracing for continued economic disruptions going forward.
As you can see from the chart of the Small Business Optimism Index, sentiment can keep declining and was a pretty good leading indicator of things to come beginning as early as 2005 to the 2008 – 2009 recession. A good time to become optimistic again is when there is no more confidence – which could be a long way off yet. We want the bear to hibernate again, but he’s just woken up.