Have We Finally Hit Bottom? Some Indicators Say Yes, Others Urge Caution

There's an old and extremely morbid joke in economist circles: How do you get a firm decision out of an economist? Remove one of his hands. This bit of gallows humor came about thanks to economists' tendencies to note that, no matter what is happening, on the other hand, things could be completely different. That's just what happened recently as new reports suggested several indicators were showing that, after weeks of economic carnage, we'd finally hit a bottom in stocks. But on the other hand, the S&P 500 may not be out of the woods yet.

On the One Hand....

There's actually quite a bit of good news in the market right now. The recent rebound the market staged was one of the best weeks the stock market has seen in just over a decade by some reports, and it's clear that the government is willing to do just about anything short of actually allowing businesses to be open to get the economy back up and running.

Several major indicators have appeared to suggest that the decline in the market may have at least halted for now, as noted by State Street Global Advisors' chief investment strategist Michael Arone. Arone noted that the frantic selling of the last few weeks—which included almost every asset class from the wildest speculative stocks to perhaps the ultimate safe-haven asset, gold—has slowed in intensity.

Arone referred to it as “the classic capitulation move to cash”, and further noted that elements of normal market behavior were starting to emerge. The comparatively standard push-pull relationship between stocks and bonds, for example—when stocks rise, bonds fall, and vice-versa—is reasserting itself.

That wasn't the only good sign, though. A weakening in the value of the US dollar may help here as well, thanks to recent moves seen at the Federal Reserve that made borrowing a lot less expensive and helped ensure the system would remain liquid overall. A reduction in the number of stocks testing 52-week lows helps as well, a decline in global volatility as seen by the CBOE's volatility index (VIX), and similar calming down of major worldwide markets also helps.

On the Other Hand....

All of these points together suggest that some kind of improvement may be forthcoming. However, there are still some negative indicators out there that suggest more problems could be afoot.

One of the biggest problems facing world economic development right now is sheer raw uncertainty, which has been delivered to the market in massive trucks lined up for miles, metaphorically speaking. No one knows how much longer the current environment will continue, nor what the ramifications of such a market will be. The idea that this will be over quickly seems to have faded from the field, and now the big question seems to be “will we get back to normal before the whole thing collapses?”.

When isn't the only issue; what is also proving a problem. With so many businesses closed for so long, how many of them will actually reopen when businesses are allowed to, you know, actually reopen? That coffee shop that had to go carry-out only may not be able to pay its workers for much longer; will its owners simply decide to pull up stakes and list a building for sale?

The outcomes of several reports due out later this week—IHS Markit's purchasing indexes, the Conference Board's consumer confidence index, and several others—will help tell the story of what's going on in the broader markets.

At Least Tie The Hand Back

There is a lot of good news out in the market today. We're seeing stability, and a few positive signs that, at least, a corner may have been turned. Yet as is the case with the morbid joke about economists' hands, there's a lot of uncertainty out in the field that's clouding perceptions. The issues of when the economy will restart, what it will look like when it does, and what several major reports are about to say are making the market look like a potentially dangerous place. A certain amount of risk in life is necessary—we take a risk just crossing a street in many cases—but everyone's tolerance for risk is different. For many, market risk is just too high right now.

Only time will tell how this all works out. But the only way to truly restart things is going to be to take some more risk. We're going to need to tie that other hand back if we're going to get anywhere.