On Friday we shared with readers the axiom “Stocks never bottom on a Friday.” Well, are stock market bottoms formed on a Monday? That is a fair question, especially on a Monday like this one. The answer is “maybe.”
The “Weekend Effect” is the name given to the phenomenon when Monday follows the trend set on the previous Friday (like today). But does this mean Monday’s are the most likely days of the week to see a “bottom” in stocks? Well, maybe.
Our friends at Bespoke provide some data to consider. They looked at all 5% declines that have occurred on Monday’s since 1952. There have been 9 such Mondays and, in every case, the following day saw an average gain of 4.2%. Six months later, 8 of the 9 Tuesday’s saw higher prices with an average gain of 12.75%. Of course, these past results do not indicate future results. We will just need to wait and see.
Today’s stock action “felt” like a bottom is either in or nearly in. In last night’s missive, we warned that today would be a tough session for stocks. Oil stocks plummeted by 30% or so. Bank stocks declined by double digit percentages. These declines are like we saw during the financial crisis…..despite the fact we are not in a financial crisis.
This does not mean stocks turn around and higher from here and never look back. However, we believe it is constructive to future gains. This decline will prove “healthy” for stocks in that much of the excess has been wrung out of the “highflyers.” Something we anticipated would occur following the election but has been pulled forward as a result of Coronavirus.
Here is what we expect. First, a response from the President is necessary in the next day or two. Markets hate questions marks. While no one can completely answer the question of when the virus will run its course, a strong response and comforting tone from the White House will do much to lessen the fear. Leaders from Wall Street have been summoned to the White House later this week. It is likely a formal response will be forthcoming.
Second, investors must get a sense that the public response to the virus has peaked. This seems to be approaching. With the cancellation of many high-profile events it is becoming clear that the fear of being cavalier is greater than the fear of being…well, fearful. Locally, Avon school district has decided to close completely for 2 weeks. A reaction that would have seemed impossible to imagine just a few days ago now seems more reasonable since a student has been afflicted. My beloved MotoGP and Formula 1 motorsports have seen the first two races of the year cancelled completely. Princeton University has advised students to just “call it a semester” following Spring Break and not return.
Once these cancellations show signs of declining, it will signal the extreme behavior will be behind us. This will signal to markets that the uncertainty that has impacted investor behavior will be waning. Just as it is darkest before the dawn, so to will be the doubt surrounding Coronavirus.
Expect commercial-free specials on CNBC covering the “Crisis of Coronavirus” to be replaced with regular programing. Expect Coronavirus to take its place as the “event” that led to any number of healthy behaviors we will grow more familiar with as we travel. Finally, expect a violent market reaction to the upside surrounding this inevitability.
We continue to scrutinize the companies we own in our managed accounts. Despite the declines that have impacted these stocks, we remain convicted in our holdings. We believe consumers will continue to make online purchases, use gasoline, buy airline tickets, use pharmaceuticals, go to the movies, etc. Therefore, we believe companies like Amazon, Apple, Microsoft, Boeing, Delta Airlines, Disney, Eli Lilly, etc. will endure and grow into the future.
Kessler Investment Group, LLC