After a roughly 35% plunge from their February high point to their lows around 23rd March, global and Australian shares have rallied 15-20%. What’s more this rally has occurred despite increasingly bleak economic data and a record 10 million surge over two weeks in claims for unemployment payments in the US. However, volatility remains very high.
 
It’s true to say that markets usually lead, looking forward 6-12 months. We have seen massive fiscal and monetary stimulus over the last few weeks to match the COVID-19 threat to economies. So maybe we have already seen the low for shares? Or maybe not?
 
There is still a lot of bad news ahead regarding the virus and the economic hit. We still don’t know how long the shutdown will last and hence it’s hard to gauge the size and duration of the economic hit, when the recovery does come.
 
Past bear markets have often been interrupted by strong rallies, e.g. October/November 2008 saw two 19% rallies in US shares followed by the ultimate low in March 2009. This could be the case here even if we have entered into a bottoming process.
 
So, what should we look for in terms of when we can expect a bottom or be at least somewhat confident that the bottom has been reached? Not that anyone will ring a bell at the bottom or waive a red flag to signify the bottom.
 
The things we are looking for:

• Confidence that COVID-19 can soon be contained
• Measures to minimise collateral damage to the economy 
• Confidence collateral damage is being kept to a minimum
• Technical signs of a market bottom.

 
Confidence that COVID-19 will soon be contained
 
This is important as it will give guidance as to the duration of the shutdowns and their severity and hence the first round hit to the economy.
 
There are several key things to watch:

• The severity of suppression measures - After containment policies (quarantining & contact follow up) failed to control the virus (South Korea may be an exception), most countries have moved on to suppression, i.e. social distancing. This has been made necessary to allow hospital systems to cope without a blow out in deaths as in Italy. The question is are they being applied rigorously. The evidence suggests that they are. Of 41 major countries nearly 80% now have severe restrictions in place, including Australia.

• Is suppression working? - The best thing to watch for is a turn down in the number of new cases. Italy is a good one to watch as it went into national lockdown around 9 March and if they get it under control it gives other countries hope. And there are some positive signs here with a downtrend in new cases evident in Italy, Spain, Germany, the EU generally and Australia. In the US it’s too early to tell, but it’s New York epicentre is showing a decline in new cases.

Source: Worldometer, Bloomberg, AMP Capital

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• Based on China’s experience - 11-21 days after the lockdown new cases peak, and a month or so after that, the shutdown can start to be relaxed, which is why Chinese economic indicators started to improve in March. (While some question the reliability of China’s Covid19 case data, directionally it looks right and lines up with President Xi’s March 10 Wuhan visit & the restart of its economy). 

• This would suggest that the lockdown in Italy and maybe even Australia may be able to be relaxed later this month or in May, if the number of new cases continues to trend down.

• Of course, if the lockdown is eased too quickly this may risk a second wave of cases (as occurred in relation to the 1918 Spanish flu pandemic). To guard against this, quarantining of new cases and contact follow up will have to be aggressive and international travel bans would likely have to remain in place to prevent imported new cases (as China has found). There are two things that could short circuit this. 

• Antibody tests - It’s likely the actual number of coronavirus cases is being significantly underestimated because those with mild or no symptoms are not showing up for testing, but mass testing for antibodies to Covid19 would reveal what proportion of the population have already been infected and recovered. They will likely no longer be transmitters of the virus and should be able to return to work. Some estimates suggest that it’s already 40-60% of the Italian and UK populations. If so, there would already be a degree of “herd immunity” making it easier to safely relax the shutdowns. Such testing may still be several months away though.

• Anti-viral or a vaccine - A vaccine may still be 12 months away but anti-viral’s are being rapidly tested.

 
The bottom line on this is that there are a lot of balls in the air but the decline in the number of new cases in several countries including Australia indicates that shutdowns are working which in turn holds out the hope that they can be relaxed in a month or so (providing containment measures are rigorous). International travel will likely be the last restriction to be lifted.

Confidence Policy Measure to Support the Economy
 
The past month has seen a massive ramp up in monetary and fiscal measures globally and in Australia to support businesses, jobs and incomes through the shutdown period and to keep financial markets functioning properly. Policy makers are committed to doing whatever it takes to provide confidence and limit the damage from the shutdowns, which will enable economies to recover once the virus is under control. We rate this as positive, although more may still need to be done.
 
Technical Signs of a Market Bottom
 
Market bottoms usually come with a bunch of signs.

• Extreme oversold conditions - This got a tick in March.
• Apocalyptic investor sentiment - It’s very negative but maybe not apocalyptic yet.
• Signs of falling downwards momentum - This may only become apparent on a re-test of the March low.

 
Concluding Comment
Given the uncertainty around the length of the shutdown, risks of a second wave and very poor economic data to come it’s still too early to say with any confidence that we are at or close to the bottom. Trying to time market bottoms is always very hard so a good approach for long term investors is to remain invested and for new investors t average in over several months.