Investors are likely wondering if we have found the bottom yet in stocks after the major domestic stock indexes posted their worst weekly performance since the 2008 financial crisis. These indexes plunged greater than 10% last week, making for a very sharp reversal considering some of these indexes were hitting record highs just the week before. The culprit for the sell-off has been the spread of the deadly coronavirus, which is certainly impacting businesses and profits. However, when I see statistics showing the huge number of people that die annually from the common flu I suspect other factors are at play. I believe profit taking and the upcoming election are likely other factors contributing to the fall in stocks.

Several gauges I monitor lead me to believe that the bulk of the damage is behind us, as these are at levels that frequently coincide with bottoms in stocks. It was encouraging on Friday to see stocks close near their high for the day. Also, the selling late in the week was indiscriminate, as even normally safe havens like utility stocks got dumped. It should be noted that bottoms are not usually V-shaped, meaning stocks do not typically go straight back up again. Instead, there is frequently a bounce followed by a re-test of the prior lows. A recent exception to this pattern was at the end of 2018 and beginning of 2019 when stocks did indeed go straight back up without a re-test. Regardless of how the bottom unfolds, in light of the sharpness of the sell-off I would expect stocks to be in a sideways pattern for awhile as they seek to build a new base.

While the merits of bonds in an investment portfolio were again proven last month, it is hard to get too excited about bonds over the long term with the yield on the 10 year Treasury ending today at 1.09%. I expect the low yield on bonds will help to put a floor under stocks.

Glenn S. Rank, CIMA®

Certified Investment Management Analyst®

President