When Could the Markets Recover? 5 Signs to Watch

BEFORE THE MARKETS CAN RECOVER from the massive downturn created by the coronavirus, they need to “find a bottom,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That process is already well underway, he adds, with significant progress being made on three of five fronts. “We’re in the latter stages of the bottoming-out process—signs 4 and 5 are the ones we still need to see improvement on.”

Of course, everything still depends on finding answers to the health crisis that continues to threaten the lives of millions across the world, Hyzy adds. And considering the number of jobs lost and businesses shuttered, recovery will be slow, with GDP growth unlikely to return until 2021.

Below, Hyzy offers a progress report on the signs the CIO is watching that may indicate the markets may be reaching their bottom and could turn the corner towards recovery.

Sign #1: Capital flows more freely. Amid a wave of panic selling by investors in March, the Federal Reserve (Fed) promised to buy unlimited amounts of government debt and lend money to local governments and businesses to help keep capital markets from drying up. Such policies appear to be working, Hyzy says. “Capital is flowing more freely and fixed income markets are acting in a more stable manner, even as we speak.”
✔ Status: Underway

Sign #2: Stock-bond relationship normalizes. In normal market conditions, bond prices tend to rise as stock prices fall, and vice versa, so having both in a portfolio helps mitigate risk. In March, bonds and stocks dropped in tandem as investors sold them in search of cash. With stimulus helping to stabilize bond markets, the inverse relationship between stocks and bonds is returning—a key sign of market stability, Hyzy says.
✔ Status: Underway

Sign #3: Volatility eases. “Market volatility went above 80 in mid-March, the highest on record,” Hyzy says—as measured by the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The March 16 closing of 82.69 was higher even than the 80.86 level in November 2008, at the onset of the financial crisis.¹ “Currently, the VIX has fallen below 50,” Hyzy notes. “More importantly, it has fallen on days when markets are down.”
✔ Status: Underway

Sign #4: U.S. dollar weakens. Amid a global scramble for less risky currencies, the dollar has shot up in value during the current virus crisis. “This can hurt the economies and finances of emerging market countries, given their high exposure to U.S. debt, and delay the eventual recovery overseas,” Hyzy says. “Though there are signs the dollar may be cresting, we need to see some consistent weakening.”
✔ Status: Needs improvement

Sign #5: Bad news is taken in stride. One crucial sign of stability is when markets have already factored in the effects of the coronavirus on the economy and can absorb daily developments without panicking, Hyzy believes. “We’ve seen this sporadically, but it needs to be more consistent.”
✔ Status: Needs improvement

What can investors consider doing now?
The recovery, when it comes, will likely reveal an economy forever changed, Hyzy notes. We’ll see a world focused on localization rather than globalization, where technology and remote work take precedence. “It’s going to be ‘e-Everything,’ from our perspective—e-Learning, e-Medical, e-Sports, e-Social interaction and e-Work,” he says.

In the meantime, as the economy and markets find bottom, “quality, yield and growth are three factors to continue to emphasize,” Hyzy says. That may include stock and bond investments in large, well-run U.S. companies, he adds.

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