Nice rebound. What’s next?

Author: Value Investor

Date of publication: 2020-04-16

Are we out of the woods? After three weeks of a remarkable rebound from market lows, is the worst is really over? We don’t think so...

The market’s rally from the March 23 low is nothing short of remarkable. The short sellers and put buyers who had their positions established since then have lost a ton of money. All those septics and “talking heads” on CNBC who predicted that the market will go lower to retest the lows, if not worse, have been proven wrong. Right? Well, the crisis is not over yet. In fact, one might argue that it has just started and we don’t really know how long it will take for things to get better in the real economy. For now, all objective indicators are going down, and it is going to get only worse, despite the talk of opening the country “soon”. The impressive market rebound (we are talking about the US stock market here) is described by some as “technical”, i.e driven by some margin forces that dictate how prices should evolve based on their chart patterns. In our opinion, this is mostly rubbish of course, if there were not so many people who base their investment decisions on so-called technical analysis. We think that markets in the short term are driven by market sentiments or emotions and in the long run by fundamentals. If you are a short-term investor, we cannot really give you an advice here, as market sentiments could really change on a dime. If, on another hand, you are a long-term investor, we would recommend that you always keep the big picture in mind. So, what is the big picture now? Well, it rather grim. With people in self-isolation at home, the economy is in a free fall. The virus is far from being deleted. Yes, there is a very nice reduction in new infection cases in New York, but New York is not the whole the United States Besides, nobody knows what these figures will be when the lockdown ends, when it ends. One thing is undeniable: there will always be a fear of the virus resurgence till an effective vaccine is administered on mass to the population. So, what is the time horizon for this? At least 18 months. And even after that our lives will never be the same again. Whole industries (such as cruse lines) might never fully recover. Never. So, the obvious question: is the present rally justified? Is it OK that the market as judged by major indices at the year-ago level as if all we have lost in terms of the current and future economic potential is just one year of profits generated by the economy as a whole? Frankly, it just does not make any sense. What do we recommend in the current situation, then? If you are a long-term investor, we would recommend sitting on cash for now. Of course, the market still could go higher, but the risks of it crashing down are much higher. There is still a bubble in some high-tech stocks that make any rally perilous to a sadden and painful reversal.