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Market Commentary for the week ending March 28th, 2020

Summary

  • After one of their worst weeks in history, stocks posted one of their best
  • Unemployment claims surge
  • Many of the year's worst performing stocks surge this week

 

Market Summary

These are the types of rallies you cannot miss! After one of the worst weeks in history, stocks rebounded posting a huge weekly gain technically starting a new bull market.

Dow Jones industrial average year-to-date performance

Source: www.YahooFinance.com

A bear market is defined as one when prices fall 20% from all-time highs. The Dow Jones Industrial Average hit its all-time high on February 12th and was off by more than 20% at the close on March 11th. It fell further hitting a recent low at the close of trading Monday, March 23rd, down a total of -37.1%. From this Monday closing low, it rallied +21.3% in just three days technically the start of a new bull market (technically defined as prices up 20% or more from the low).

Worth noting though is that neither the S&P 500 nor NASDAQ Composite dropped as much as the Dow nor rallied as much during these three days.

I'm not suggesting our current bear market is over…but it could be. I have no idea. What I am certain of is that a long-term investor cannot afford to miss short-term rallies similar to the one we experienced during these recent three days.

Bear Markets of the Last 50 Years

Every bear market is different. The following table summarizes the bear markets of the past 50 years with some key dates for each.

One interesting comparison of these 5 bear markets is the length of time it took for each to be declared a bear market (prices falling 20% from highs). Three of these bear markets took months for prices to fall 20% (see column “Days from Peak”). The two exceptions are the crash in 1987 that mostly occurred in one day, although prices had peaked nearly 2 months prior to the day of the crash, and our current bear market that has seen prices fall rapidly.

Bear markets

Source: www.YahooFinance.com and Patton analysis

An additional interesting comparison is the length of time it took for prices to finally hit bottom. Again, in 3 of these bear markets it took stocks several more months to find a bottom even after they had already fallen 20%. The one exception was the crash of 1987 when prices never dropped below the closing prices on the day of the crash. A second exception could be our current bear market although time will only tell.

Bear market rally or new bull market?

During every bear market stocks of course experience rallies or various magnitudes similar to the three day rally we’ve just seen. The question, as always, is whether or not the rally is a 1.) bear market rally, one where prices rally but then ultimately go lower, or 2.) the start of a new bull market where prices never go back below the recent lows. The fact is that it’s impossible to know! Bear market rallies and the start of new bull markets look the same.

Here are the biggest rallies during the 4 prior bear markets. Every past bear market has witnessed a significant rally in a relatively short period of time similar to the rally we’ve recently experienced. The crash of 1987 is a bit of an exception because the 2 day rally immediately following the day of the crash was technically the start of the next bull market given that prices never fell below the lows on the day of the crash.

Bear markets rallies

Source: www.YahooFinance.com and Patton analysis

The takeaway from this is that bear market rallies simply do occur and, during longer bear markets, sometimes more than once. The more important point though is that distinguishing the bear market rallies in the above table from the rallies that kick off a new bull market, shown in the below table, is, again, simply impossible.

Early bull market rallies

Source: www.YahooFinance.com and Patton analysis

As you can see in the table, the length of time it generally took for stock prices to rally 20% from their bear market lows was relatively short. The exception is the crash of 1987 when prices did rally sharply in the 2 days that followed the crash but then bounced around for some time before resuming a trend higher.

You will see also in the above table that I included the recent 3 day rally. As I already noted above, I do not know if this is the start of a new bull market or just a bear market rally…it’s anybody’s guess. I do know though that this epidemic will pass. Furthermore, the impact of the epidemic on the markets will likely pass well before the epidemic itself is gone and long-term investors simply cannot miss out on the short-term market rallies. The best long-term returns will come by staying the course!

This Week's Performance Highlights

Market indexes Week ending March 27, 2020

Source: www.YCharts.com

  • International developed markets topped U.S. markets gaining +12.4% lead by U.K. stocks up +16.4% and Germany’s market rallying +16.4%
  • Large U.S. stocks gained +10.3% as measured by the S&P 500 while the NASDAQ lagged behind up +9.1% and the Dow outperformed jumping +12.8%
  • Small U.S. stocks outpaced large for the week gaining +11.4% but continue to lag behind year-to-date
  • Real estate stocks posted a monstrous gain +18.1% after having been down -44.9% at the lows
  • Gold gained +8.7% for the week and is high for the year by +6.5%
  • Bonds posted relatively sharp gains up +4.7% pushing yields lower

There were some massive winners this week fueled by hope that government aid will provided some needed support. You will see though that the biggest winners this week are all still some of the biggest losers for the year.

Week's biggest winners

Source: www.YCharts.com

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