Stock Market Rebound: Is the Stage Being Set for the Sharpest Recovery in History?

Forget about hearing of a stock market rebound. It’s mostly doom and gloom that you hear about in the headlines these days. While the coronavirus (COVID-19) pandemic is truly something scary, you should be aware that it’s times where pessimism is dominant where it can be profitable to be more optimistic.

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Yes, the coronavirus outbreak can and will get much worse. And that’s going to keep the markets depressed over the intermediate-term. Many pessimistic investors are increasingly skeptical of vaccines or treatments in the works because they don’t want to get caught holding the bag making an investment decision based on false hope.

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Stock market rebound? Even rallies are to be feared these days!

This market crash has had several big bounces that have proven to be “suckers’ rallies” that have followed much larger declines. We’ve already invested through two Black Mondays and a Black Thursday.

With liquidity drying up across the broader range of asset classes, it’s those who’ve been holding cash (and now bonds) that have a chance to rise out of this market crash far richer than when they entered it in the event of a stock market rebound.

It’s foolish (that’s a lower-case “f”) to panic sell because you read an article that brings up the possibility that we’ll fall into an economic depression. After all, few things are more unpredictable than biology. With a high degree of unpredictability comes unprecedented volatility — not just down, but also up.

By default, I do expect the stock market will continue retreating until evidence suggests that the invisible enemy that is the coronavirus can be defeated.

The way I see it, we’re in the middle of a war against the virus. And until signs point to a victory for the people, investors will continue to shrug off rich fiscal stimulus packages, rate cuts, corporate bailouts, and other forms of non-scientific tools to halt a potentially severe global recession (or depression).

But is it possible that investors have grown too skeptical? Too negative? Possibly. But it’s hard to blame them given these dark times. After a 35% peak-to-trough drop, a stock market rebound is unthinkable at this point. Let’s not mince words; we’re in a pandemic, and many businesses could find themselves on the brink amid a potential national shutdown.

Doing “too much” could lead to a historic stock market rebound

Many investible companies a few months ago are flirting with bankruptcy today. And with governments around the world throwing everything but the kitchen sink to stop the spread of the virus, it’s become clear to everybody that it’s far better to do too much than risk not doing enough.

During the Financial Crisis, some pundits argued that the Fed was asleep at the wheel. This time around, tools of monetary and fiscal policy have been used in record time to avert a potential economic disaster.

Only time will tell whether the stimulus will work, but can you imagine the kind of rally we’d get in a best-case scenario where a vaccine comes to be and the virus is eradicated far sooner than initially expected?

While it seems far-fetched now, as with most things biological, it’s worth remembering that a breakthrough can happen at any time.

In any case, I view the stock market as an escalator that’s going down. And given the unprecedented stimulus that’s to remain after a potential eradication, I’d say the escalator could be going down to a floor that has an elevator that could take investors back to the top floor.

Foolish takeaway

I don’t want to give investors false hope or encourage investors to exhaust their cash reserves on the riskiest of stocks.

Rather, I’d urge investors to keep their cool and continue buying incrementally on the way down and not pay too much attention to the quick losses your recent buys are likely to rack up. Similar to 2008, any stocks purchased on the way down will be great purchases in the grander scheme of things, after a stock market rebound.

While it’s hard to be optimistic in these dark times, it can pay dividends not to lose all hope and buy pieces of businesses that are also doing their best to chip in and not let the coronavirus have its way with the economy. Most recently, Wal-Mart announced its intention to pay special cash bonuses to its hourly employees.

Throwing cash at the public may prove to be a powerful tool to combat an economic downturn and fuelling a stock market rebound. But of course, we’ll have to wait and see how things pan out as the fight against the spread continues.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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