With coronavirus anxiety slowing the economy, stock market fear is rampant. And it still could get worse. But eventually, the mood will shift from fear to something entirely different — fear of missing out on the eventual rebound.
Are we there yet? Probably not, but who knows? It’s not like a basketball game (remember those?) when a horn sounded to end the first half. There won’t be a horn dproclaiming an all-clear signal with this. The bottoming of the stock market, when it arrives, might not be apparent except in hindsight, possibly months later.
Here are some observations to help put it all into perspective.
Should we wait for a recession to end?
Probably not. You might think it’s premature to start looking for a stock-market bottom before a potential recession ends. Recessions are defined as two or more consecutive quarters of declining economic output. We haven’t even had one negative quarter yet, so it hasn’t officially arrived.
The National Bureau of Economic Research, the agency that makes the official call on recessions, might not issue any such proclamation until the second half of the year.
No matter. Investors won’t be waiting for an official start to a recession, let alone a declaration of its end. They will be anticipating business conditions six to nine months out. The stock market is a leading indicator, meaning it is something to watch for clues on where the economy is heading, and it’s moving unusually fast right now.
The stock-market trend isn’t a perfect economic indicator. Investors have overreacted before to bad news that didn’t usher in a recession, such as with a sharp downdraft in 1987. But this time feels different, with more signs pointing to a recession ahead.
Will we need to see good news first?
Not necessarily. As noted already, no all-clear signal will be given. But investors likely will require some signs of improvement before mustering the courage to dip a toe into the water.
“Stocks will begin to recover long before the pandemic is on the wane,” predicted Rob Arnott, chairman of investment firm Research Affiliates in a recent commentary. “The strongest bull markets are not built on a foundation of good news, but on diminishing bad news.”
What might diminishing bad news look like? Maybe it will involve some employers hiring more help or calling back furloughed workers, even as others are laying off people. Other signs might include the hosting, again, of public meetings, the opening of restaurants and toilet paper returning to shelves — indications that life is returning to normal. A tapering off of new coronavirus infections and deaths obviously would be a positive signal or at least a less-bad one.
This will come eventually, though the timing is hard to pinpoint. “As fear peaks in the weeks to come, the time will also come when bargains make themselves obvious,” Arnott continued. “Don’t wait for the good news — just wait until the pattern of bad news lets up.”
Why not just wait it all out?
That could be the best move. One market commentary I read recently was topped with the clever headline: “Don’t (just) do something, stand there!”
The point is that no action could be the best action to take. It would prevent you from selling out at what could be the bottom — and really triggering regret later.
But the inaction mantra should be tempered somewhat by your circumstances. As Christine Benz, Morningstar’s director of personal finance, pointed out in a recent video, there could be some reasons to tinker with your portfolio now.
Mainly, she said, this would involve planning for large upcoming financial needs within the next few years and segregating some money to meet those expenses, by putting the funds into a less-risky bank account or money-market fund.
Conversely, this also might be a time to become more aggressive. If you received a large windfall from an inheritance or business sale, or have let dollars accumulate in a deposit account, now could be the time to start moving them into the stock market, she added.
As usual, big institutional investors following computer-generated trading signals are being blamed for much of the volatility. Retail investors, by contrast, don’t appear to be all that active, according to the Investment Company Institute, a mutual fund trade group that tracks cash flowing in and out of stock funds.
“The data that we have to date suggests that investors are probably behaving pretty much as they have in the past (by making) small changes,” said Sean Collins, the group’s chief economist.
Might rebalancing make sense?
Yes. One wise investment strategy that doesn’t involve trying to identify stock-market bottoms is to rebalance your portfolio periodically by taking some profits from assets that have fared well and reinvesting the proceeds into laggards. This approach assumes you want to maintain a roughly stable portfolio mix of stocks, bonds, cash and so on.
During the long bull market from 2009 to earlier this year, rebalancing mostly meant taking some profits from stocks and reinvesting the proceeds in bonds. Otherwise, your portfolio would have become increasingly top-heavy with equities. But now the reverse might be happening a bit, with some investors pulling money from bonds and cash holdings and reinvesting the proceeds into the stock market.
“An investor who wants to maintain a portfolio target of 60% equity and 40% bonds would need to sell a slug of bonds to purchase equities,” explained Collins at the Investment Company Institute.
For the week ending March 4, the most recent period studied, investors sold more bond funds, amounting to $24 billion in net redemptions, compared to stock funds at $14 billion, reported the institute. Investors, in general, sold bond funds despite the normal tendency for bonds and bond funds to rise a bit as interest rates decline.
While it might not seem obvious amid the stock market’s wild swings, rebalancing helps to stabilize the market as investors sell bonds and cash and then reinvest the proceeds into stocks, Collins added.
Reach Wiles at [email protected]