Signal: Red light

Conclusion: Market Risks Remain Despite April Rebound
Economic fundamentals worsened during the month; however, markets proved to be exceptionally resilient, as investors drew confidence from continued progress in combating the spread of the coronavirus. Despite the rebound for markets during the month, real risks to markets still remain, highlighted by high historical valuation levels and mixed technicals.

March’s downturn was driven not just by a breakdown in fundamentals but also by increased fear around the spread of the coronavirus. Therefore, the partial market recovery in April makes sense given the progress we made as a country in combating the coronavirus during the month. With that being said, markets are currently pricing in a swift economic recovery, and there is no guarantee that will be the case. In fact, with certain states beginning the opening-up process in May, we may see further spread of the coronavirus in the near future. Ultimately, if efforts to combat the spread of the coronavirus meet any significant headwinds, further market volatility is likely.

As such, we are keeping the overall market risk indicator at a red light. This is not a sign that markets are headed for another significant drop. Instead, it is a recognition that the path back to normal is likely going to be longer than markets seem to expect, with the potential for setbacks that could lead to additional market pullbacks. Given the uncertainty created by the pandemic and the likelihood for further volatility, equity market risks remain high despite recent outperformance.

Brad McMillan is the chief investment officer at Commonwealth Financial Network.

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