March 27, 2020 | Coronavirus Resources
The magnitude and velocity of the recent stock market selloff was enough to unsettle even the most seasoned of investors. While we have seen similar waterfall selloffs in the past, each one has its own unique causes and is accompanied by its own unique economic backdrop. So, while no two events like this will ever be the same, we thought it would be instructive to review other swift selloffs and look for similarities among them to set expectations for what is likely to develop from here.
We believe that finding a bottom in the stock markets is more likely to be a process rather than an event. In other words, while the rally this week has been a welcome relief, we expect volatility to remain high in the coming weeks and the odds suggest we are likely to retest the recent lows before we ultimately move higher.
The chart below provides a graphical representation of the “average” waterfall selloff and the recovery that follows. Of the events listed, only the 2018 decline was not followed by a retest of the prior lows. Nearly 70% of past retests ultimately led to lower lows than the levels seen at the bottom of the waterfall. We would expect to see the volatility remain elevated for at least one to three months (the median is 1.8 months) as data surrounding the coronavirus situation develops
Once the uncertainty around the virus decreases and we see a successful retest of the initial lows, we expect to see a strong and sustained rally in stocks. On average, the Dow Jones Industrial Average has rallied around 24% in the year after a waterfall bottom. Rather than relying on historical analogs to forecast how the recovery will unfold, we will continue to rely on data to inform our decisions and will revise our outlook and allocations as dictated by future developments.
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This information has been prepared by Legacy Private Trust Company for informational purposes. Any opinions expressed herein represent our current analysis and judgment and are subject to change. Actual results, performance, or events may differ based on changing circumstances. No statements contained herein should substitute for professional legal, tax, or other specialized advice.