The bear market: The right way for investors to use opportunities in the stock market

The right way for investors to use opportunities in a bear market

You may be familiar with the stock market adage: "Sell in May and go away." It means we should divest our holdings from the first four months of the year. Does this apply to the 2020 bear market as well? Read on for an analysis. 

The bear market: Rally or long-term recovery?

Since March 23, the equity markets have continued to recover, even though the economic conditions have scarcely changed. All of the standard economic indicators will continue to reach record lows in the weeks ahead. This is nothing new. Historically, most post-war bear markets have meant a bear rally, i.e. a brief price recovery.


But this time could be totally different. After all, if any crisis deserves to be called "unprecedented," it's the coronavirus crisis. Not only the scope, but also the monetary and fiscal policy measures to boost the economy have been unprecedented. So, for investors, the question is whether to take profits from the price recovery on the markets before they drop again. Or was March 23 the low point, to be followed by smaller corrections?

Why March 23 may be the lowest point for the equity market

There are good reasons to believe that the stock market hit its lowest point in late March, and we might be at the start of a longer-term upward trend.

  • The unprecedented monetary and fiscal policy response to the coronavirus crisis, which has provided the equivalent of more than CHF 8 trillion in emergency funds to date, is certainly unique. The US Fed's balance sheet alone grew in the past few weeks by USD 2.2 trillion, from USD 4.1 trillion to USD 6.3 trillion. It seems inconceivable that measures like these wouldn't result in higher prices.
  • The current US monetary policy is taking a page from the history books: just think about WWII and the post-war era. Back then, the Fed monetized fiscal deficits by capping the long-term capital market returns at 2.5%. It worked. The S&P 500 and the Dow Jones Index doubled between 1941 and 1951.
  • Although the Fed and the European Central Bank do not invest directly in equities, they stabilize credit spreads and financing conditions, which in turn benefits the equity markets.
  • In many cases, valuations – especially for the global equity markets apart from the US – are still hovering around their record lows of 1984 and 2009.
  • A gradual decline in new infection rates for the coronavirus is reason for hope, as we saw with Asian equities after SARS.
A comparison with the SARS crisis raises hopes for the equity market

Comparisons with the 2003 SARS crisis give investors cause for optimism 

Left                                                            Right
Information worldwide without China          Last data point: May 21, 2003
Last data point: April 20, 2020                   Source: Credit Suisse                
Source: Credit Suisse

The best place for investors on the stock market now

The prospect of a sustained recovery on the stock exchange is giving many investors a glimmer of hope. Our experts also believe that we put the worst behind us after March 23. However, there is always a risk of bear traps and temporary bear rallies. Investors should proceed with caution but take advantage of opportunities. Here are six tips.

  • Investors can use (expected) setbacks to purchase additional equities.
  • You can never time bear rallies perfectly. When making additional purchases or selling off equities, investors should follow their strategy and not their emotions.
  • High-yield bonds have lagged behind equities thus far. If the worst is behind us in equities, then high-yield instruments, such as emerging market bonds in USD, are an attractive option.
  • Betting on the winners for the long term while avoiding the losers applies to this crisis as well. The digital economy and the technology behind it are likely to remain the economic and financial market winners of tomorrow.
  • As the economy recovers, demand and prices for petroleum products will rise. However, the industry is facing a great deal of consolidation pressure, which the large, integrated, well-capitalized corporations will promote.
  • In phases with increased equity volatility, gold usually generates positive weekly returns.

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