The Week on Wall Street
The stock market staged a broad rally this week, buoyed by both the prospect that COVID-19’s grip on the nation may be easing, and also the news of another Federal Reserve program to help stabilize businesses.
FACT OF THE WEEK
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The Dow Jones Industrial Average jumped 12.67%, while the S&P 500 climbed 12.10%. The Nasdaq Composite Index rose 10.59% for the week. The MSCI EAFE Index, which tracks developed overseas stock markets, advanced 6.32%.
A Change in Sentiment
Market sentiment took a more hopeful turn on news of an apparent peaking of cases in Italy and New York State. Investors also welcomed comments by Dr. Anthony Fauci that the start of a turnaround in the outbreak is close at hand.
The S&P 500 Index surged 7.03% to start the week and added to gains as the week progressed. Positive trends in COVID-19 cases, an agreement between Russia and
Saudi Arabia to cut oil production, and the Fed’s unveiling of a $2.5 trillion loan program
to assist small and midsize businesses all fueled the rally.
Credit Markets Stabilize
As the economy shut down in March, credit markets began to exhibit deep stresses. A functional bond market is essential to economic and financial health, which is why the Federal Reserve initiated several actions aimed at helping them to operate.
Intervention by the Fed appears to have helped. A raft of new bond offerings may be signaling that investors are now willing to take on more risk. Last week, eleven investment-grade companies sold nearly $20 billion in bonds.
A stable credit market helps the stock market, and while the bond market is not yet out of the woods, its improving health is a positive sign.
One of the most prominent challenges for investors in the last month has been determining realistic stock valuations amid uncertainty over corporate earnings. With earnings season about to unfold, investors may be better able to gauge the impact of the pandemic on company profits.
Investors will get to hear from corporate leaders about the state of their businesses and possibly their outlook for the next few quarters. This new insight may help fill in the gap that currently exists, but what remains uncertain is whether that information proves to be positive or negative for the market.
FINANCIAL STRATEGY OF THE WEEK
PULLBACKS, CORRECTIONS, AND BEAR MARKETS
The COVID-19 outbreak has put tremendous pressure on stock prices, prompting some investors to blindly and indiscriminately sell positions at a time when the entire market is trending lower. Worried investors believe "this time it's different."
When the market drops, some investors lose perspective that downtrends and uptrends are part of the investing cycle. When stock prices break lower, it is an excellent time to review some common terms when describing the market's downward momentum.
A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5-10% after a peak as a "pullback."
The next degree in severity is a "correction." If a market retreats 10% to 20% after a peak, you are in correction territory. At this point, you are likely on guard for the next tier.
In a bear market, the decline is 20% or more since the last peak.
All of this is normal.
Pullbacks, corrections, and bear markets are a part of the investing cycle. When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions.
Pullbacks and corrections are relatively common and represent something that any investor may see from time to time in their financial life, often several times over the course of a decade. Bear markets are much rarer. What we are experiencing now represents the start of the ninth bear market since 1926. This bear market follows the longest bull market on record.
How is this bear market going to affect me?
The majority of us want to know how this will impact us directly. The truth is we will not fully understand the extent in the here and now. The average bear market lasts 146 days for the S&P 500.
The best retirement strategy is formed with a financial professional and will have market volatility already factored in. Your advisor will help you to determine when the necessary time is to make adjustments and help you make any significant decisions along the way.
Their goal is to help you pursue your goals.
As always, please contact my office with any questions or financial concerns you may have.