Should You be Wary of the Market Rebound

Global stock markets have been climbing steadily for the past two and a half months from their late March lows and that rebound came to a screeching halt on June 11 when various markets closed the day down around five per cent on average.

On Friday (the next day), the markets rebounded but only made up a portion of the ground from the previous day’s losses. Is this a minor blip in the continued recovery or the start of a second market pullback?

While history has shown that many of the strongest growth periods occur immediately after major drops, this rapid rebound has left many wondering why its so strong and if it will last?

There are certainly many people wondering if investors are getting a bit ahead of reality. Sure, central bankers have responded with overwhelming force to the pandemic and public health authorities are gradually increasing the re-opening measures but there is still a lot we don’t know about what comes next.

At this point, we really don’t know how well contained the virus is and if it will produce a second (or even third) wave. Another wave would very likely re-shut parts of the economy that are slowly restarting.

The way the markets have surged back to pre-pandemic levels (not the Canadian market so much but US and global ones) suggest investors have all but relegated the idea of a second wave to zero. I would suggest that we don’t know quite enough just yet to make such a call.

Having said all of that, we have seen many times in the past where a rebound like this directly after a major market downturn does in fact last and the markets continue to make new highs. The point is, we don’t know yet and your investment decisions need to take this into account.

In addition, we have growing renewed trade tension between China and the US which could put further strains on company earning outlooks.

And to add more fuel to the volatility, we have a US election that is just around the corner – an event that will very likely increase market volatility on its own. But it is very important to remember that market volatility surrounding US elections is typically due to investor emotions and not fundamentals and should not sway your investment decisions.

So, to be clear, I am not suggesting we are definitely going to have another pullback and you should sell everything to cash. But at the same time, I don’t think this is the time to get extremely aggressive with your investment plans either. Like most other environments, the reasonable approach would be to stick to a well diversified allocation that is within your risk tolerance comfort.