Why You Can Expect a Market Bounce

I finished off last Tuesday’s piece with this:

‘And while I’m usually loathe to panic (and prefer to remain optimistic), I do think a sensible approach to the situation right now is to make sure you’re comfortable with how much money you have invested in the stock market.

‘The old trader maxim says: “If you’re going to panic, panic early.”

‘So, for what it’s worth, I personally have lowered my exposure to share markets. I’d rather do it now and be wrong, than be caught in a rush for the exits later.’

Since that piece, markets have indeed spun out of control.

The US Dow Jones Index had its biggest one-day point drop in history on Friday, capping off its worst week since the 2008 financial crisis.

Panic selling has begun.

I read anecdotal evidence on Twitter that the CommSec share trading platform was struggling to process orders on Friday under the weight of people trying to log in.

As I said on Tuesday, if you think you’re going to panic, you need to get out before such mad rushes for the exit.

It’s knowing your own temperament and how you react to different outcomes that’s the real key to getting through times like this.

Which is why I want to give you my best guess on what’s coming next.

So, you can think about how you will react in advance…

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Now is not the time to panic

Just as the time to panic was early last week, the time to panic sell isn’t now.

No one was panicking early last week. Everyone is panicking today.

When it comes to emotionally-driven markets, you want to try to do the opposite. Or at least not get swept up in the hysteria.

Friday’s selling looked like a capitulation to me.

The mainstream headlines were at fever pitch. Check out this headline for example:

When I see that I know investors won’t be acting rationally. And when broker platforms are crashing, you know it’s close to the bottom — at least in the short term.

That’s why I fully expect a market bounce soon.

I was watching Bloomberg on Thursday morning and they had a professional trader on who said he was looking to ‘buy the dip and sell the rip’.

The question for investors is not whether we’ll get a relief rally. We almost certainly will for reasons I’ll outline shorty.

But will it be V-shaped and result in the bull market continuing? Or will it be a W-shape with a few stops and starts? Or most worryingly, a kind of M-shape of ups and downs before a bear market for the rest of 2020?

All are possibilities for you to consider, as well as 23 other letter-shaped pathways!

But for my money, I think we’ll get a W-shaped market recovery in 2020.

A relief rally followed by further falls as the contagion effects — both the virus and economic consequences — filter out over the next few months, ending in a new leg of continuing bull market.

If that happens then there will be great buying opportunities for you over the next couple of months, but you’ll have to choose your stocks wisely.

Though of course I could be wrong (it wouldn’t be the first time!). But here’s why I think this is what’ll happen.

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Governments won’t do nothing in response

As Isaac Newton said ‘for every action there is always an equal reaction’.

Governments won’t do nothing in response.

And while governments and central banks have wasted a lot of firepower over the past few years propping up a bull market, they still have a significant economic arsenal at their disposal.

They will try and stimulate the economy out of this, as soon as the virus seems under control.

The US Federal Reserve has room to cut interest rates further and I fully expect President Trump to put immense pressure on them to do so.

There’s a US election in November, don’t forget. And we know Trump will do all that it takes to win. Tax cuts, government spending, trade deals…it’s all on the table.

Elsewhere…

There’s talk in the powerhouse economy of Europe, Germany — ever reluctant to get into debt since their experience of hyperinflation way back in the 1920s — about economic stimulus.

And in Hong Kong they got blunt about it and just gave out $10,000 to every citizen over 18.

Here in Australia, any talk of a ‘back in black’ budget surplus is slowly fading.

After bushfires and now this to start off 2020, the Morrison government is ready to backflip. Expect some big spending announcements in travel, infrastructure, and education soon.

Political realities tend to win out over political ideologies.

In short, we’re seeing the era of helicopter money raining down on everyone.

I’ve no doubt we’ll get a monumental global stimulus to try and spend our way out of any economic downturn.

The big unknown right now is the coronavirus.

How bad will it get and what are the economic consequences of containing it?

Which is why I think things will get worse before they get better. The market will be headline-driven and a lot of that will be fear as the virus spreads and death rates and infection numbers go up.

But in the next few weeks we’ll start to get accurate data on the spread and mortality rates. We’ll start to fill in the gaps.

And markets prefer certainty — even if it’s bad news — over unknowns where the worst is assumed.

What should you do?

It all goes back to what I said at the start.

Being right isn’t what matters. Making sure you’re comfortable no matter what, is. That’s different for everyone.

Personally, I’m starting to see bargains in the small-cap area. Stocks that have literally nothing to do with the economy or coronavirus that are just getting sold off in a mass panic.

Harking back to the GFC, I remember 2009 was the greatest year for picking small-caps in my lifetime.

So, while I’ll try to be patient and see how this plays out for a month or two, I’ll also be looking to ease some money into a few good long-term picks very soon too.

You’ll have to decide for yourself how you play this.

But don’t be reactive. Instead, think strategically and be ready for anything.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.