March Market Update

What are we watching for?

Below we have discussed several different signals that the PWA Investment Committee are monitoring to identify a suitable time to start increasing the allocation to bonds and shares as we progress through this market correction.

What sort of market cycle is this?

There are many letters being thrown around as to how this market cycle will play out. A “V” recovery means a sharp sell-off and an equally sharp share recovery (as seen in the 1987 stock market crash). A “U” shaped recovery means a deeper and lower for longer bottom (as seen in the 1930’s stock market crash). A “W” sharped recovery means the market has a recovery before another correction and then a further recovery (as in the 1966 market correction).

In considering which cycle we might be in we must look to what is causing the correction and how the central banks and governments are responding. Quite clearly the response to shut down economies to limit the spread of Covid-19 is the reason for the sell off. This in turn is impacting earnings globally which is causing share market investors to sell out of companies.

Given this is a health event, and not a market event we are currently not expecting a U or W shaped recovery. This view may change if market liquidity dries up or interest rates continue to rise on the back of an increased risk of bond defaults as discussed later in this document.

The government response to date has been to provide unprecedented stimulus, with a similar but smaller response last seen in WWII. In our view the response from the central banks and governments is underwriting the bottom of this cycle and likely to provide a good level of support to economies and corporations through this event. This does lead us to currently believe there is a good chance we will see a V-shaped recovery later this year.

But what signals are we watching for?

Every Dow Jones draw down greater than 30%

Source: Bloomberg, WSJ Daily Shot

Signal 1: Volatility calming

As at the 26th March, volatility and market uncertainty remain at levels above the peak seen in the 2008 Global Financial Crisis. This can be seen in the Volatility Index (VIX) chart below, which is a measure of the market’s expectation of volatility over the next 30-days.

If this index stays high the daily movement in markets can expect to remain volatile. When this reduces this may be an early signal that markets are calming, and we are potentially closer to the bottom of this sell off.

CBOE Vix Index

Source: WSJ Daily Shot, Bloomberg

Signal 2: Daily new cases of Covid-19 peaking

This is a key indicator in this crisis that all market commentators and analysts are watching, as a potential signal for a turn in share markets. Please note this signal is a not a “reduction” in the number of Covid-19 cases, just a “peak” in the number of new cases daily. The reason for this is that markets are forward looking and will price in what is expected over the coming months to year.

At present new cases of Covid-19 continue to climb hence this is still not a “buy” signal.

Total number of cases per country since 100th case

Source: John Hopkins University, CSSE, Worldometers, Financial Times

Signal 3: Market capitulation

As we go through a market sell off there are different stages that occur in an investor’s psychology. When comparing the charts below it would suggest we went through the “denial” phase in mid-February, with the “return to normal” phase being seen March 2020. We have now moved into the “fear” stage.

This just leaves the market “capitulation” phase which we may occur in the coming months. What may trigger this for investors is the very real negative impact people have had to their lives from the quarantining of large portions of populations around the world. For investors locked in their homes the fear of the world stopping is now feeling very real.

The market cycle – from an Investors point of view


Below I have shown the S&P500 performance so far this year. As you will note there are some interesting similarities to how this sell off is progressing vs. the psychology chart above.

S&P500 – The journey so far in 2020

Source:, PWA

Markets are never this easy to pick just to be clear and sell-offs like this don’t usually follow any known playbook. This is simply conjecture and one of the signals that we consider when looking to deploy cash.

Signal 4: Global Bond Spreads

When pricing any investment there are several different factors you must consider allowing you to determine the return you want, commensurate with the perceived risk you are taking. All calculations start off the risk-free rate of return (government bond yield) and then add a margin on top of this to compensate the investor for the perceived risk of the investment. This margin is called a “spread”.

The spread is a number that can change over time impacting asset valuations both positively (spreads decline) and negatively (spreads increase). At present we are seeing spreads on both investment grade (high quality bonds) and junk bonds increase markedly as shown below.

Investment Grade Spreads

High Yield (Junk) Bond spreads

Source: Daily Shot, Bloomberg

We are not yet back at 2008 levels but as you will note that are rising quickly. If these spreads continue to move higher the borrowing costs for global corporations, small companies, and even residential home borrowers may move higher.

This change in spreads is probably the biggest concern in the markets at present as having a company’s borrowing costs increase at a time when their revenue is declining is not a good situation for anyone. The thing that gives us a little bit of comfort around this is that central banks are already aware of this risk. Unlike when Lehman Brothers was teetering at the start of the Global Financial Crisis (GFC) the central banks are supporting markets at a level only ever seen during periods of world war. We are hoping this will be enough to calm the bond markets. This is another signal to watch closely.


At present it may feel like the end of the world for you. This is understandable given the correction we have seen has been bought about by a virus that is at your front door. However, it is important to keep a perspective – this will be a difficult 2 – 3-month period for all of us, but it will pass.

Markets are currently trading at record high levels of volatility which will likely present investment managers with an opportunity to purchase shares at a much cheaper price than they were a month ago. It is simply a matter of figuring out when to start buying. The signals above are some examples of what we are watching in this regard.

When we do move it will likely be a staged entry over time as we are not trying to pick the bottom of this correction. You can be rest assured the recommendation to start purchasing will come, and likely sooner than we think.