Quarterly Market Overview July 2020 – Royal Fund Management
Our March 17th video reminded us that the market always overreacts. We also discussed that an event- driven bear market would likely lead to a faster recovery. Another reason to have expected a quicker recovery is that the selloff started from a time when the economy was strong.
The market finally bottomed on March 23rd and we put out another market commentary video on that day. We discussed how the market does not like uncertainty, but the certainty was that we will recover. We always have. Economic stimulus was on the way in the form of monetary stimulus from the Fed and fiscal stimulus from the legislative branch. We used this opportunity to make changes to our investment strategies to add diversification and improve quality. Even higher quality stocks were selling at very reasonable valuations.
In our video on April 16th, we said we believed that the level of panic we had witnessed was a good sign that we had seen the market bottom. The “baby had been thrown out with the bath water” so to say. We also reminded that the market, as a leading indicator, can recover as much as a year ahead of the economy itself.
In our most recent market update, we warned about the potential for more volatility, but overall, expected the recovery to continue.
So where do we go from here?
The speed of the market recovery has been amazing. In fact, it has acted more like a recovery from a normal market correction than from a bear market. A correction is defined as a pullback of 10%+ from a market high, and the market typically recovers in three or four months. A full recovery from a bear market is historically about two years. We did expect a quicker recovery since it all started from a time of a strong economy, and event-driven bear markets recover faster. However, we have even been somewhat surprised at how fast this market reversal has been.
We do believe a market pause is not unlikely, and the market may be a little ahead of itself short term. However, we do not believe there will be much downside when the next scary moment arrives for the following reasons. First, the amount of stimulus thrown at the economy both by the Fed and the legislative branch has been unprecedented. Also, with the anticipation of more to come, this puts a bit of a floor under the market. Second, there is simply little competition for stocks. Let’s look at bonds for example. Interest rates are so low that there is extreme interest rate risk if rates were to rise. If one bought a 10-year US Treasury bond currently paying about .65%, a rise in rates to just 1% could create over a 30% loss if the bond had to be sold in a higher interest rate environment.
We remain intermediate to longer term bullish. Shorter term, we still expect more volatility and maybe even some scary moments. Recently on June 11th, the DOW fell over 1800 points, but as of today, it has again recovered. There is still a lot of uncertainty. We remind our clients to think six months or more out and the market, and our economy, will be fine given time.
On a personal note, with the recent spike in coronavirus cases in many States, continue to take care of yourself and those you love. We will get through this trying time together. New therapeutics are helping people recover faster and a potential vaccine may be on the way. For now, stay vigilant and practice the habits that can keep you safe.