As of the writing of this post this Thursday morning, the markets are up significantly this week as the chart below shows. It sure feels good to investors! Does this mean the markets have turned the corner and will start a bull market run?
This is a difficult question to answer, and there are two ways to look at this.
One is, the spread of the virus has slowed down and with encouraging results from using hydroxychloroquine as a cure and the potential of a vaccine down the line the recession is likely to be short. Therefore, the markets are rebounding and will continue to do so in anticipation or rising profits in the future as people get back to work and the economy starts to grow again.
A second point of view is that the market uptick is just a normal bear market rally due to some good news but that stocks are likely to fall again as bad economic data is released over the next few months.
Which perspective is right? Only time will tell. But I lean toward the second point of view. The economic news coming out in the coming months is likely to be horrific, particularly the unemployment data. It is possible, but hard to conceive, that there would be no downward market reaction as the economic reality of this recession sets in.
Should one take more risk now that stocks are rising? Though we would love to recommend that at this time, stocks are not very undervalued, and if the second point of view turns out to be correct, the market will drop more and then could become more undervalued presenting an investment opportunity.
It would be wise for portfolios to not be totally defensive and be out of the market so there is some upside potential if markets continue to rise, but they should be more defensively positioned if markets fall more due to coming bad economic data.
