Is this a Bear Market Rally or the Beginning of a new Bull Market?

In April the market appeared to focus on any good news and ignore the bad. Clearly the actions of the Federal Reserve and the central bank to flood the economy with money gave investors confidence. April was one of the best months in the stock market in decades. Historically “best months” do come during bear markets. By April 9th the Dow Jones Index had recovered half of the loss from top to bottom. Having this strong rally leaves investors wondering if this could be the beginning of the next bull market. Anything is possible, but the market isn’t giving clear direction yet. If it is the beginning of a new bull market, it will leave behind one of the shortest bear markets in history.

For the last three weeks of April the market traded in a range between 23,500 and 24,500 points. At this writing, we have five trading days in May behind us and trading continues in this range. This period of consolidation could be a base from which to see another uptrend, but historically such a consolidation takes more than just 6 or 8 weeks.

Given the real situation on the ground, another decline would not be surprising. Businesses are reopening in most states, but the challenges are great. Will restaurants, hair salons, spas, and other personal services businesses be able to survive on less than half their previous revenue due to social distancing requirements? The forced shutdown has resulted in 33 million Americans being out of work. How quickly will those jobs come back? Be prepared for at least one more dip to the March lows in the next few months. It is no time for investors to let down their guard.

Even with strong improvement the market is signaling a reason for concern. The lack of breadth in this rally is not convincing. While growth stocks, and specifically the tech sector, have done well other sectors including transports, regional banks, home builders, and small caps have lagged. A strong bull market needs broad participation and we don’t see that yet in this rally.

Diversification is a good way to weather a bear market. True diversification involves a combination of the main asset classes which includes stocks, bonds, cash, gold and real estate. Bonds and gold have done well this year even when the stock market has rallied. Bonds are typically strong when interest rates are falling. They do not hold their value during times of high inflation. One complaint about gold is that there is no yield. In the current low yield/no yield environment, gold does not have to compete for yield. The price of gold dropped in March along with stocks, but in April gold resumed an uptrend and is trading well above its 200 day moving average. There are often opportunities in these other asset classes when stocks are lagging.

As long as uncertainty persists our focus is on preservation of capital. This includes using diversification and holding more cash than usual. There are some opportunities in a small sector of stocks, but it is no time to chase gains. There is plenty of fear to go around these days, and some investors have a fear of losing out on a market rally. New opportunities will be there in the future. Right now preserving capital and having cash to seize those opportunities when the market is in a positive trend should be the focus.

If you have questions about your own account, please call us. We are happy to do a phone review with you.

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our view at the time of this writing and is subject to change. This is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us. We are here to help and welcome your call.

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