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A History Of Counter-Trend Rallies

A History Of Counter-Trend Rallies

| May 04, 2020
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The last two months have been eventful, to say the least. Would you have ever imagined back at the beginning of February that the world would be where it is now? Back then, kids were in school, markets were soaring, people were going on vacation, and we were scared to cut our own hair. It’s amazing how quickly things can change, isn’t it?

Now it seems normal to stay home all day, every day. The word “zoom” has taken on a whole new meaning. It’s considered polite to wear masks in public and obligatory to cherish toilet paper. It amazes me how quickly people are able to adjust to the “new normal.” While the ability to adjust and adapt is good, it is important that investors not grow complacent. Because the stock market’s “new normal” may not be normal at all. 

Where Is The Market Right Now?

After peaking on February 19, the S&P 500 fell into one of the fastest tailspins on record. In a little over a month, the market dropped 34% before bottoming out on March 23. It was a nerve-wracking time for investors, but things have been looking up since then. 

It hasn’t been the smoothest ride, but the S&P 500 has gained a full 25% over the last month. (1) Technically, that puts us back into bull market territory. Investors are breathing a sigh of relief and relishing this “new normal.” But is this really the new normal?

What Does History Show Us?

History would tell us not to be so sure. Yes, the stock market has made an impressive recovery. But is it really recovering? Or has it even hit bottom yet? Take a look at the graph below.

As you can see, it’s normal for the stock market to make an impressive recovery while it’s still on the way down. If you look back at 2001 and 2008, you can see that near the beginning of the last two major stock market downturns, the markets rallied and gave a false sense of recovery. It’s ironic that they both lasted 8 weeks and began during the same week in March. That’s kind of an ominous sign, considering that our current rally began that same week in March. 

Does that mean that this rally will only last 8 weeks before an even bigger drop? No one knows what the future holds. But it does mean that just because the stock market is up this month doesn’t mean the worst is behind us. Just because it seems like the market has hit bottom doesn’t mean it really has. For all we know, there’s still a ways to go down before it begins to recover for good. 

What Should You Do About It?

I don’t mean to rain on your parade or be the bearer of bad news, but I believe caution is in order. Rallies after market drops are normal, but that doesn’t mean that the market is recovering quite yet. It’s a little too early to get comfortable and start celebrating. 

How did you feel during the month of March? Do you think your nerves can handle another big drop this year? If not, then your investment portfolio may not truly reflect your ability to bear risk. Now is a good time to review your portfolio to make sure that you are ready for what the future holds, whether good or bad. For a complimentary consultation, reach out to Nichols Financial Strategiesat 559-440-6999 or by email at matt@nfstrategies.com.

About Matt

T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work towards achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.

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(1) As of 4/22/20

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