One of the safest times to invest is when the news is awful and markets are depressed: the Time of Deepest Gloom. - John Train
In the many conversations I have had with clients recently, there have been some common topics and discussions that have come up. One of which is a misunderstanding that the economy and markets move in parallel to each other. They are certainly connected, but the market attempts to anticipate and respond to economic outlooks much more rapidly. This is important if you are trying to time the bottom of the market.
Let’s be clear. What is happening right now is very real and very serious. The virus is going to get worse as is the economy. The market, however, is on a very different timeline and pattern. We know through epidemiology and exponential growth that COVID-19 is definitely going to escalate in many areas of the world. While there have been some hopeful signs in places like China, South Korea and a possible slowing in Italy, we know that it has not hit the peak in countries like Canada, and the US. I don’t think anyone is debating that point. The global economy has also started to suffer, and it is going to get worse as the lockdowns continue and unemployment climbs. I don’t think anyone is debating that point either.
The market, however, never waits for anything to happen. It goes down in advance of the economy. That is why the market (TSX) has already dropped almost 38% from its high point to its most recent low. In economics, we would call this a leading indicator. The good news is that on the flipside, the market will not wait until the virus is gone and the economy is all better to start going back up either. Fear will quickly turn to greed. We will start to see “green shoots” or little rays of hope that things are going to be better. This could be the government and central bank intervention. It could be a slowing in the rise of the virus in New York or North America. It could be positive news out of China or a removal of restrictions in Italy. It could even be news that companies are hiring workers back. We don’t really know when things will turn around, but we can be sure that the market will not wait for the virus and the economy to be better.
The good news is that on the flipside, the market will not wait until the virus is gone and the economy is all better to start going back up either. Fear will quickly turn to greed.
I have noticed that clients often confuse the idea that the economy is going to be bad with the idea that the market is going to go down further. I think they find it strange that I don’t feel the market will go down much further, when a lot of the bad virus statistics and economic consequences have yet to play out. I’m not saying it can’t go down further, but theoretically a lot of the bad news should be already priced in.
Remember that after the 2008-2009 financial crisis, the markets hit their low point and started to rebound rapidly while we were still in the middle of a recession. In the early 90’s, the markets rebounded very early in the recession as well. While the market is hard to predict, I would not be surprised if we have already seen the market bottom or that we will see it soon. If you are waiting on the sidelines for all the bad news to be gone before going back into the markets, you may very well miss a good part of the recovery. No one holds up a sign and says this is the bottom of the market when it is happening. It is something that is only identifiable when looking through the rear view mirror.