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Road to Recovery Playbook

Road to Recovery Playbook

March 26, 2020
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We continue to follow our Road to Recovery Playbook for help determining where the market is in its bottoming process.

Today we are making two changes. The first is to Signal #1, which we upgraded from “monitoring daily” to ”almost there.” We aren’t ready to check this one off completely, based on the latest data from Johns Hopkins, but we may be able to declare the peak with confidence over the next week (though we acknowledge a second wave cannot be ruled out).

View expanded chart.

The other change we have made is to Signal #4. Recent gains have removed oversold conditions. With stocks having just staged one of their strongest three-week rallies ever, more sellers may emerge. Measures of market internals, such as the percent of S&P 500 Index constituents stocks above their 200-day moving average at 23%, no longer reflect such intense pessimism as in late March, when this statistic fell below 5%, below the lowest levels in 2008.

Our last change to the playbook on April 3 was to downgrade Signal #3 because of the strength of the latest stock market rally—stocks are no longer pricing in a recession with the S&P 500 Index’s bear market decline of 34% having been cut in half. The S&P 500 has lost 16% since its February 19 high and 11.9% year to date through Tuesday’s close. That signal remains “Almost there.”

The last two signals remain unchanged. The historic surge in unemployment gave investors visibility into the severity of a US recession (Signal #2). Today’s retail sales report for March provided more evidence of just how deep this economic contraction will be.

Finally, the policy response from the Federal Reserve and policymakers in Washington, DC, was more than enough to check off Signal #5 in late March. But more stimulus may be on the way in the form of funds for small business, state and local governments, and the healthcare system.

With only two of our five signals now in place, we believe stocks may be ripe for a pullback. “Stocks may now be pricing in more of a V-shaped recovery, and less of the U-shape that we are likely to see,” according to LPL Equity Strategist Jeffrey Buchbinder. “We don’t know for sure if the March 23 lows will be durable, but given stocks’ tendency to retest lows after waterfall declines, a pullback from current levels seems more likely than not in the short term.”

The near-term risk-reward trade-off has become less favorable, and we think a more attractive entry point may emerge soon. However, even with the S&P 500 27% off the lows, we continue to like the opportunity for long-term investors and maintain our overweight equities recommendation.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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This Research material was prepared by LPL Financial, LLC.

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