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Financial Intermediaries / Why Knowing the Absolute Market Bottom Doesn’t Matter

Market Events

Why Knowing the Absolute Market Bottom Doesn’t Matter

Sébastien Page, CFA, Head of Global Multi-Asset
Key Insights
  • The key question our Asset Allocation Committee is debating is how much risk to take on relative to stocks versus bonds.
  • We have been marginally adding to stocks, but after recent market gains, we intend to hold our moderate overweight to stocks relative to bonds.
  • A study of previous market sell-offs over the last 90 years shows that investors should not be overly focused on timing the absolute market bottom.

Transcript

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We don’t have a house view at the firm, but the key question we’re debating in our asset allocation committee is how risk-on do we want to position our portfolios, in particular the stocks versus bonds decision. We think people saving for retirement should be invested for the long run and should stay diversified over time, but tactically are there opportunities to add to stocks on weakness or should we be pulling back and playing defense?

During the sell-off, we have been adding to stocks on the margin. Now, over the last two weeks, the S&P 500 is up 26%, which is remarkable, so at this point we’re going to sit tight and keep our moderate overweight stocks relative to bonds position. Should we try to time the bottom? Have we seen the bottom? Or are we going to revisit an even deeper bottom? It turns out it doesn’t matter that much. You don’t necessarily have to try to time the absolute bottom in order to implement tactical decisions on stocks versus bonds.

We just did a study going back 90 years. We looked at 17 times during which the S&P 500 sold off by 15% or more, and if you had bought early, say one month before the absolute bottom, you still would have made money on stocks versus bonds 12-month forward 17 out of 17 times, a 100% hit ratio. Interestingly, if you bought late, say one month after the absolute bottom, you still would have seen a 100% hit ratio. You would have made money 17 out of 17 times.

This is historical evidence. The current crisis is quite different in the speed of the sell-off, in the speed of the economic heart attack, and in the speed of the monetary and fiscal response. But nonetheless, the bottom line is that there’s no need to time the absolute bottom if you’re willing to add to risk assets when they’ve sold off significantly. Now on stocks versus bonds, we’re going to sit tight for the moment, but we’re also going to look for other opportunities to add risk. Over time, one year forward, two years forward, it’s likely that those positions will pay off.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of April 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.

T. Rowe Price Investment Services, Inc., Distributor.

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