Recessions are eventually followed by economic recoveries and stock market crashes are usually followed by rallies. The usual questions for the market are how soon, to what degree, and which stocks will lead the way. The coronavirus pandemic and the need for worldwide social distancing measures have driven the world into a recession that some fear will last ten years or more. The Dow Jones Industrial Average has lost all of the gains of the Trump era and US employment has lost all of the gains since the Financial Crisis. If you are investing in stocks during this moment of crisis, when should you buy stocks again? Depending on which stocks you buy and when, will the coming rally be a profitable monster or a sad fizzle?
Will There Be a Post-coronavirus Stock Market Rally?
Market Watch is in the camp that expects the biggest rally ever as the coronavirus subsides. Their arguments are generally persuasive, but investors always need to do their own analysis when investing in stocks. Here are their arguments.
- Interest rates will be low for years to come which will make stocks more attractive than bonds, CDs, or other interest rate-dependent investments.
- The Fed will increase its balance sheet up to the $6 to $8 Trillion dollar range and history tells us that much of this money ends up in the stock market which will fuel a huge rally.
- Consumer demand is getting bottled up because of social distancing and when things get better people will be eating out, traveling, and hitting the mall in huge numbers.
- The will be a huge short squeeze as traders betting against a recovery get burned. Like with the Tesla short squeeze that we wrote about recently, this will drive the market up.
- Globalization is going to take a big hit, especially with the “anywhere but China” movement. As supply chains get shifted there will be a huge amount of investment which will spur the economy and the market.
- The unprecedented amounts of stimulus monies being thrown at the coronavirus crisis will at least partly find their way into the stock market and drive up prices.
- Low interest rates will drive retirees away from bonds and into stocks to retain their earnings in later years.
Is This Good Investing Advice?
If you buy their arguments, you will want to invest in an index fund that tracks the S&P 500 because they do not have any advice about which investments will do the best during a comeback rally.
We are not convinced that so much money will make it into the stock market because much of the stimulus money is going to buy groceries, pay rent, and keep workers on payrolls.
If there is a short squeeze, it will be temporary. In fact, the Tesla short squeeze we wrote about was immediately followed by a sharp fall bringing the stock back to about where it was before the squeeze.
What Kind of World Will It Be Post-coronavirus?
One of my children recently mentioned how many of her friends were “starting to sound like Grandma” who lived through the Great Depression. (saving every penny and never leaving a room without turning off the lights). Our belief is that this experience, which is not anywhere near over, will shape beliefs and habits for a lifetime. People are more likely to put money in the bank or secure dividend stocks than take long vacations for some time to come. Any rally will be based on people putting their financial lives back together.
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