The idea behind publishing free articles was to convey institutional asset management know-how and help investors navigate the markets. Our approach is often contrarian to public consensus. Therefore, many disagree with our content. Nonetheless, those who followed us know that we expressed a strong opinion that U.S. equities drop towards the December 2018 low. We published here articles related to the U.S. equity market with titles such as “A Bull Trap”, “A Sucker Rally”, “Pennies In Front Of The Bulldozer”, and “China Shot The U.S. Equity Bull”. Eventually, the bearish stance conveyed in these articles proved entirely correct.

Most investors are irritated by the elevated volatility recorded most recently and insecure about what to do with their equity investment. The good news is that most of the correction, but not all of it, is probably behind us short-term. The bad news is that equities are going to be a trader’s, instead of a buy-and-hold, market during the next few years. Valuations of U.S. American stocks remain relatively high despite the most recent correction. Only the periods leading to the 1929 and 2000 highs recorded higher valuations historically. 

Source: Prof. R. Shiller, Yale University

Pundits have been obsessed with calling lows and suggesting to buy the dip throughout the most recent crash. Nonetheless, a final washout drop is eventually likely for the S&P 500. The witnessed severity of the past few weeks has never formed a cyclical low during the past 150 years – not even in bull markets. Meanwhile, there is fully-fledged panic in the market. Overseas indices are overextended to the downside as we witnessed an unprecedented global sentiment swing from extreme greed to panic. Most often, such situations occurred near a reversal. The latest reading of our sentiment gauge showed a similar situation as in early 2018 or during the Brexit vote. The last trading week probably carried the index even lower towards the fear levels recorded in late 2018. However, periods of extreme greed or fear can persist. Hence, we expect a bumpy path to the downside with volatile double-digit swings both ways during the next weeks. 

Source: ESI Analytics Limited

A panic exit is most likely suboptimal despite further correction potential short-term. Liquidity will come back into the market eventually. The only realized catastrophe is a short-term economic one so far. Nonetheless, a favorable resolution is likely as Covid-19 is the dominating narrative behind the panic.

First positive signals come out of South Korea where infection numbers are encouraging. The country had the most severe outbreak shortly after China and handled its crisis in a very effective manner. As a result, their infection curve is peaking. An example among many other measures is that they back-tracked mobile phones of infected persons and displayed their movement patterns publicly via an app. Consequently, the broad public was well informed and could avoid clusters of infections. The Asian country recorded only roughly 8,000 infections in a total population of 51 million despite the highest testing ratio per capita worldwide. The South Korean model can be adopted in other countries to mitigate the spread of corona along with the negative economic consequences. After all, their approach has been successful and did not involve denying the outbreak or shutting down an entire country, which seems to be the strategy of some other governments.

Source: John Hopkins University, Statista

There are smart and talented people in the medical field. The South Korean policy will not be unnoticed. Human innovation is likely to be the driving force behind other solutions that mitigate the current crisis. Some form of v-shaped recovery will eventually take place. Most likely, it will be a large capitals V for some sectors and a small capitals v for others. For equity investors, it is most likely the best strategy to keep calm and wait for a recovery. Another drop below the December 2018 low is likely but also an attractive opportunity to buy the dip. 

Special Note: Do you have any personal links to the health authority in your country? Point your contact to the South Korean data evidence and handling of the corona outbreak. Their experience could be beneficial to you and your proximity.