Where Will the Market Go From Here?

Stock market declines are scary and as the losses increase the more frightening it can be. It’s easy to hyper focus on the daily volatility and without a plan that can lead to emotional decisions. Emotions tend to lead investors to sell near market bottoms. In the 5 ½ weeks from February 12th to March 23rd the Dow Jones Index declined almost 11,000 points. It was a 37% free fall in 27 trading days.

Then, on March 24th the relief plan of the Federal Reserve and the US Treasury became public and a sharp rally ensued. In fact, March 24, 25 and 26 gave the best 3-day gain since the 1930’s. To date, the market has regained almost half its loss from the top.

On April 7th the Dow Jones Index high for the day was 23,617. It pulled back and closed 1,000 points lower that day. In the 10 trading days since then the index has traded in a range between 23,000 and 24,000 points. 24,000 points is one of those round numbers where analysts see selling pressure, so it is normal to expect some back and forth here. To confirm this recent rally, we would like to see the index trade solidly above 24,000 points. At that level it will move into a positive trend and that would be a bullish sign. Until then the market direction in the short term is not at all clear.

No one can tell you with any certainty where the market will go from here. Everyone has the same data, but one group says that the market hit bottom on March 23rd and given the strength of the recent rally you should expect it to continue to go up from here.

Another group studies the same data and tells you that it is highly likely the market will decline again in the next few months at least to the March 23rd low, perhaps lower. Why do they say that? There have been 15 bear markets since 1950. In only one out of 15 the market did not retest the initial major low. In 14 of the 15 bear markets, the low was tested once or twice before the beginning of the next bull market. The government has thrown a lot of money at this crisis to keep the economy going, but there is still a lot of uncertainty about the economic impact.

It’s easy to relax when the market has recovered half its losses, but it is important not to become complacent at current levels. We don’t know if the market will decline to the March low again or not, but we have a plan if it does.

Investors who check their account balance daily or even multiple times a day are probably taking more risk than they are truly comfortable with. Risk profiles taken when the market is in an uptrend can differ significantly from the investor’s risk tolerance in the throes of a bear market.

Since the market has regained half its 2020 losses, this is a better time to evaluate and consider some changes than three or four weeks ago. If you have questions about risk management please call us.

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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