By: James Hand

The markets are up? Why and what does it all mean?

Tags: Stock markets Canada

While we all continue to hunker down and do what is right by practicing social distancing, even missing our family get togethers this past Easter weekend and while many of us are also wondering what is going to happen to our personal finances as well as the economy as a whole, something is happening that could confuse many of us. The stock market is on the rise. While stocks are still down by about 20% since about the third week in February of this year both U.S. and Canadian equities have risen by about 25% since March 23, right in the thick of where we felt everything would be crashing. We all know COVID-19 is still cutting a significant and often devastating path around the world, so why is this actually happening and what does it mean?

For the second week in a row, markets are up, with the S&P 500 climbing by about 12% between  April 6, and  April 9, while the S&P/TSX Composite Index rose by 9.5%. (Markets were closed, perhaps thankfully, on Good Friday.) Again, while stocks are still down by about 20%  U.S. and Canadian equities have risen by about 25% over the last few weeks, since March 23. So hooray for your portfolio, which, if you listened to some experts advice and didn’t sell out, has recovered at least some of its losses. 

But as welcome as these recent gains may be, now is not the time to get carried away according to articles written by both CNBC and the Globe and Mail. Many professional investors much like many of us, don't think we’re out of the woods yet—and that stocks could see another big decline.
 However, Warren Buffett and Charlie Munger of Berkshire Hathaway still continue to push looking at your stocks as a business that you own, not something traded on a whim and that the markets should be looked at long term because you can't predict the market on daily headlines. Here's Mr. Buffet's interview with CNBC.

Whether you follow Buffet's advice or another expert, there are a few reasons as to why stocks have been rising over the last couple of weeks. One is that we now have at least some idea as to how devastating COVID-19 will be to the global economy. That may seem strange, but many markets tend to be forward-looking—meaning that investors often react (often emotionally) before bad news comes out. (Markets tanked around February 21 in anticipation of this devastation. At that point companies were still operating as usual.) As brutal as first and second quarter growth numbers will be—a lot of people, including former Federal Reserve chairwoman Janet Yellen, are expecting a 30% contraction in U.S. GDP—investors feel better knowing it’s going to be bad. 

As well, there appears to be some early signs that the COVID-19 curve may be flattening in hard-hit areas like New York, though sadly people are still getting sick and many even dying. At the same time, we know that a lot of scientists are working hard to find a vaccine (though it will still take 12 to 18 months to land on something that works, according to experts), while other treatments and drugs are being tested. 

All of this is contributing to the recent market gains; people are starting to feel a little bit better about where everything is headed. (Volatility, as measured by the CBOE Volatility Index, better known as the VIX, is also down, falling by 50% since March 16. A lower number means fewer ups and downs.)

If you Google “stock market bottom,” you’ll find many many different opinions as to whether the market will continue rebounding from here or if it will drop by another 20%. Obviously, I don’t know what will happen or I'd be extremely wealthy and sitting on the dock of my lakehouse everyday, which is why it’s important to not get too excited about the market’s direction. Stock prices are no longer trading on fundamentals—with earnings falling off a cliff, it’s hard to judge a business on the usual metrics. Instead, stocks are trading on the news. When there’s good news, the market rises and when it’s bad, stocks fall.

It’s entirely possible and unfortunately more likely that more bad news is on its way. If GDP growth falls by 50% instead of 30%, then the market could drop again. If the rate of infections and deaths starts to rise again—whether in Wuhan, which just relaxed its social distancing rules, or in New York—the market could plummet. If a vaccine takes longer than 18 months to find, or if we’re quarantined for another six months instead of two, then you can be sure people, and the market (whatever it is), will get nervous again. Anything that happens unexpectedly will likely give an emotional jolt in the wrong direction. 

We all should continue to remind ourselves that there is no magic Matrix pill here, and that the most important thing you can do right now is stay level-headed and patient, whether we're talking about COVID-19 itself or any one of the markets (stock, real estate etc.). According to 'MarketWatch', bear markets like the one we’re in now last, on average, 18 months, with the deepest bear markets taking 7 and a half  years before reaching all-time highs again. While many people hope that stock markets and the economy will rise as fast as they fell (real estate is a lag market and doesn't react the same way or with the same speed), more analysts are coming out to say that this won’t be a V-shaped recovery—which is when the economy drops fast, but then rebounds quickly. Instead, they predict, recovery will be more U-shaped, which means it could take months, if not a year or so, before the entire economy gets back to some semblance of normalcy. If you're wondering what this could mean for the housing market, I'd be happy to have a virtual coffee with you and chat about it.  Click the 'Contact" tab or give me a call, I'm always available.

Remember, which I have to remind myself of as well, markets do tend to climb over the long term, as both Mr.Buffet and Mr.Munger say, and that people are resilient. We all may just have to wait for a few more months of gains, rather than a few weeks, before celebrating.