US Stocks Pull Back After Impressive Run
US Stocks are taking a breather after an impressive three-and half-week advance. Investors have become a little too complacent considering the global pandemic and related economic fallout continues. News of a possible vaccine candidate advancing or a better COVID-19 therapeutic would certainly help Wall Street recover more quickly from its latest setback.
Keep in mind, pull backs during market advances are normal. Market rallies can get ahead of themselves, especially with all this liquidity sloshing around. Bear market rallies can be confusing and difficult for investors to comprehend. Investors ask themselves; why are equity prices increasing when the economic news is so negative? In addition, after a nice bear market advance, some investors are quick to pull the trigger and sell on any news which indicates stocks are ahead of themselves. Essentially, investor fear increases faster during bear market cycles which causes more of the weak holders to sell (see the VIX Index below). We think trading the market is difficult and should be left to the professionals. A better, more proven approach is to buy great stocks and hold them for the long-term. During times of market stress, we look for bargains. We are not looking to sell. Looking more closely at the market data and history, market pull backs are quite common during major market advances and this time is no different. The average pull back is about 10%-15% during market recoveries so we are only about half-way through the selling as of today, or down about 5-7% from the prior highs.
On the economic front, the US House of Representatives is looking to pass another stimulus bill in the $3 Trillion dollar range. For those that are keeping score at home, 3 trillion is a 1000 billion three times or 3000 billion dollars. That is a lot of money. The Federal Reserve also started purchasing corporate bonds this week, which began to ease the stress in the fixed income markets. The Fed indicated they still plan to purchase high yield bonds as well which will help the fixed income markets recover further. Stock investors like it when everything is copasetic in the equity and bond Universe.
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