The bull market people have claimed is the longest in history is now over. The stock market is plunging down a cliff faster than in 1929 during the Great Depression. So what’s next on the agenda? Many experts are trying their hands on calling the bottom of the market because that would be the optimal time to invest. I will start by saying that calling the bottom of a market is never possible, but there are many factors that will affect when the market will bottom out. Knowing what these factors are could make you more comfortable in investing and possibly help you buy the market while it is at least lower.
Markets Can Only Go So Low
In addition to markets only being able to climb so high, markets can also only fall so low. As hard as it is to believe the market as a whole will not hit 0. Not unless you believe that literally everyone will sell all their equities. This includes the people who are hesitant to withdraw from their IRAs and/or 401ks and people who are willing to sell their shares for 10% of their original price. Furthermore, you would need to believe that these companies provide no valuable services nor products.
However, with the US having the highest percentage of people over 65 (about 17%) in history and with COVID-19 going about people over 65 are scared for more than one reason. If people over 65 are invested in the market they will likely pull out more than they should right now. People may sell their equities pretty quickly, but not everyone. Other people will see this bear market as a buying opportunity. Therefore, the market will only go so low.
The Coronavirus Will Not Be The Largest Factor
One of the best factors for calling the bottom will be if the number of Coronavirus cases stops growing or starts decreasing. As soon as the pandemic starts to come under control people should have a considerably less fearful mindset. That is not the only thing people are afraid of.
There have been 700,000 claims for unemployment benefits in March 2020 in the US. That is because many people are out of a job or reduced hours. That sounds obvious, but answer me one thing. Is it obvious that any of these people will go business as usual after the whole scare of the Coronavirus is over? Unfortunately, no.
Who Will Be Out Of A Job?
It is too early to say who exactly will be out of a job. Many places have thrived and even grown during this crisis. The list of businesses that have grown include cleaning consumer products, toiletries (no surprise there). A little more surprisingly technology companies and pharmaceutical companies are positioned to grow but airlines, tourism, and restaurants will take a hit. The Coronavirus started to become more global just before Saint Patrick’s day. For those who do not know, Saint Patrick’s day is a religious holiday that has leaned more towards the…cultural end of the spectrum. Now I hear more about Saint Patrick’s days plans involving going out and drinking heavily. Some restaurant owners I know say that Saint Patrick’s day week provides them with a tenth of their yearly revenue. At least in Pennsylvania they pretty much shut down restaurants during this time. Now restaurants will have at most 90% of their potential revenue this year with this opportunity gone. I do not know any one in the tourism business or directly involved in airlines, but I imagine they are facing similar if not worse issues. This is going to be where many of the job losses are.
With these job losses there will be some people without an income. This will slow down the economy even further and the economy will not instantly recover from these job losses. This will make calling the bottom harder because I believe that the economy will still shrink after the panic of the Coronavirus disappears. By how much? I don’t know, but at the very least I do believe it will shrink slower than it has is recent weeks. I would not expect the market as a whole to stagnate much less grow consistently in the next two months.
The Oil Price War
It is true: people only care about what is first. The Coronavirus has been a thing since December and has come to the US in February. The oil price war between Saudi Arabia and Russia started in March. These both are almost as impacting on the economy, yet people only care about the Coronavirus.
In the pricing war Saudi Arabia essentially dumped some oil into the market so oil in now cheaper. That may sound good for the general public, but not so much for petroleum companies who now have to price their oil lower because of the suddenly higher supply. Furthermore, the Coronavirus has all, but shut down travel and even commuting to work so there is less demand for oil. High supply, low demand, what does that lead to again? Right, less expensive product/service.
Now many petroleum companies are in a pinch and some may face bankruptcy. You may not be employed by a petroleum company, but 145,000 people are. If all of these companies face a pinch you could expect much of the employees’ and employers’ income to drop. Not only would fewer people have an income to invest, but some local economies may shut down because their customers work for petroleum companies. This will only further impact local economies and other sectors.
While people are focused on the Coronavirus there are still many events occurring that are impacting the economy. I most likely ignored some other events that are occurring in the world. They may even affect global businesses. However, I believe these events are going to have a larger effect on smaller businesses than larger businesses. This will be more troublesome to venture capitalists than most investors. Despite this the effect of the petroleum pricing war on local businesses is going to make calling the bottom more difficult.
When Should You Try Calling The Bottom?
Forget about all of the economic experts. Forget about me. When do you think the bottom will occur? You may not feel like an economic expert, but truth is no one can predict the economy’s behavior better than they can predict the behavior of every single person in the world. Every person is directly tied to the economy. The behavior of the economy and every individual is correlated.
Do you feel comfortable investing in the market right now or sometime in the near future? If you do, you are a very financially sound person. The economy cannot exist without financially sound people feeling comfortable with their investments.
If you do not feel comfortable investing in the market that is perfectly fine. In fact, you are not the only one (I am a little hesitant myself and have cut back on my contributions temporarily). If you are not comfortable investing in the economy you will likely pull your money out before you get a return. This will not only force you to delay investing further in the market, but it will make calling the bottom more difficult. You also determine when the market bottoms out.
There are too many factors at play in the economy to make calling the bottom any accurate. The Coronavirus is still a thing. Furthermore, the oil price war and other factors I have not brought up could affect the economy. Ultimately, people including yourself need to be comfortable with investing in the market in order for it to start the first stages of recovery and not a minute before.