April 1, 2020

COVID-19: How Low Can the Market Go?

COVID-19: How Low Can the Market Go?

If you’re a shaken investor sitting on big paper losses, getting an indication of when can we expect the stock market to stop falling amidst the global turmoil is probably at the top of your Geez I-wish-I-knew list.

With the S&P 500 index down more than 30% since the commencement of the COVID-19 outbreak, investors are trying to assess if more pain is ahead or the worst of the selling is over.

So, even if it isn’t time to buy yet, when will it be? How low can the market go?

The truth? No one knows. Any answer would be just a guess given the level of panic in the market.

But that doesn’t mean that Wall Street’s best haven’t been busy analysing past market crashes in search of signs as to when the selling will ease off.

Here are a few things to follow if you’re searching for a bottom:

COVID-19 Infections Peak

One indicator that investors are waiting to see before sighing in relief has little to do with corporate earnings, economic growth or price-to-earnings ratios: it’s a number that illustrates coronavirus infections are in retreat.

A peak in daily infection rates is something we should look out for when presuming a market bottom. An equity strategist from investment firm Credit Suisse told CNBC that during the SARS crisis in 2003, stocks bottomed a week after infection cases topped out. 

Follow the ‘Fear Gauge’

Stock market sell-offs often correspond with sharp spikes in the level of the VIX (CBOE Volatility Index).

Dubbed the “fear gauge” of Wall Street, the VIX is a popular measure of the stock market’s expectation for volatility over the coming 30 days.

After the S&P 500 plunged 12% last week, the VIX surged to a 52-week high of nearly 84, far above its low of 11 in the past year.

Likewise, the VIX shot up to nearly 77 on March 12 when the stock market fell 9.5%. The bottom line: if bearish investor sentiment retreats, stock prices will rise.

Forecasts for Dow and S&P 500 Lows

One of the main jobs of Wall Street firms is to crunch numbers related to economic growth and corporate earnings and predict how bad bear markets will get. The recent market estimates from stock experts suggest the worst is yet to come.

This past Friday, Goldman Sachs said it expected a mid-year low of 2,000 for the S&P 500, a further 17% drop from Wednesday’s close of 2,398, and a 41% decline from the February 19 record close of 3,386. 

Look to Past Bear Markets

Past bear markets can provide an estimate for whether investors can expect further declines. The S&P 500, at its closing low last week, was 29.5% below its record high.

How does that compare with other lows? The average bear market loss since 1929 is 40% and lasts 21 months, according to S&P Dow Jones Indices. History has shown that bear markets occurring during recessions tend to be deeper (37% decline on average) than ones that don’t involve recessions (24%).

Look to Past Stock Market Floors

Levels at which stock market indexes stopped going down in past market collapses are often viewed as a floor – or support – for future market collapses like we’re currently seeing.

Analysts look at stock charts and draw long-term trend lines where selling stopped in the past. If those old support levels “hold,” there’s a good chance buyers will view that level as a good entry point to buy stocks, and by that, stabilising prices.

So, Have We Bottomed Yet? 

We may be getting close to the notion that “stocks are on sale,” but many analysts believe we’re not quite there yet.

If the stock market plunge worsens, there will come a point where investors decide that stocks have become so cheap that they’ve become a screaming buy, in return shooting up the market.  

Another thing to remember- when pessimism is at a peak, most of the people who wanted to sell already have. That clears the way for buyers to swoop in and pick up bargain-bin-priced stocks.

Our advice: keep your eyes peeled for signs of a market bottom, but at the same time, trade slow, trade smart and follow any unfolding global developments.

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