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Call a Stock Market Bottom at Your Own Peril

By Mohit Oberoi, CFA - Published 6 Months ago. 0 Comment
Call a Stock Market Bottom at Your Own Peril
  • Stock markets globally have bounced back sharply from their March lows. However, Main Street is still feeling the pain from the pandemic as economic indicators show.
  • Fund managers like Paul Tudor Jones and Mark Mobius expect a double bottom. However, some analysts see the stock market rally as sustainable.

Stock market bottom

US and most global markets created a bottom in March. US stock markets are up roughly 30% from their March lows. That’s a splendid recovery just like the crash. Lest we forget, the current bear market crash was the sharpest on record and it took only 22 trading days for the S&P 500 to plunge 30% from its highs. Some analysts and fund managers are skeptics after the V-shared recovery in markets. Mark Mobius and Paul Tudor Jones are calling for a double bottom. A double bottom is W-shaped price action and stock prices fall to their lows before a rebound.

The economy is hurting

The economy is hurting badly from the pandemic. While governments globally are trying to do their bit to contain the economic fallout, it's never enough in such unprecedented scenarios. Some of the sectors like entertainment, aviation, travel, and tourism would take a much longer time to resume normal operations. Some of the airlines like Virgin Atlantic are shouting aloud for a bailout. Chairman Sir Richard Branson has also offered his private island as collateral.

Also, it would take an elongated period for the job losses to fully reverse and some of the jobs might get lost permanently. Its no surprise that Berkshire Hathaway is playing it safe according to Vice Chairman Charlie Munger. Incidentally, Berkshire Hathaway is playing it safe despite sitting on a $128 billion cash pile according to the most recent filing.

Should you trust the rally?

There is always the FOMO or the fear of missing out factor. But then, these are extraordinary times. We still don’t have a medicine for the virus and there is always a risk of a second wave of infections. Stock markets were slow to price in the pandemic, to begin with. However, when markets took cognizance of the financial impact the crash was severe and possibly a bit exaggerated.

Now, markets are getting a little too optimistic about the recovery. It would not be a pure V-shaped recovery in my view. The pandemic would also leave a big hole in government finances across the globe. Rising sovereign debt might also lay the seeds for a debt crisis in the future. For now, markets are ignoring many risks. As for investors, ignore the risks at your peril.

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