The Market’s Crystal Ball

I hope this newsletter finds you well. It is amazing how the world can change in just a few months. The recent environment helps us remember what is most important in life—family, friends and health. A big thank you to my clients! It is a privilege to help you navigate this financial market.

In the last newsletter the main article was titled “Hindsight is 20/20.”  In it I discussed how markets are always clearer when we look back in history. Six months from now March 2020 will appear and feel very different than it does now. It is certain that markets can be very volatile in the short term, but, over the long-term positive returns are more prevalent with the market recovering over time.

Investment Markets Are Forward Looking. Investors are always trying to peer into their crystal ball to estimate what company values will be like in the future. Without a doubt, crystal balls are very murky right now. Economic prospects are changing by the day. Uncertainty can wreak havoc on investment markets.

The longest bull market in history came to an abrupt halt on February 19th, after rising 400.5% for 131.4 months, since March 9, 2009.  From peak to trough (on March 23, 2020) the S&P 500 price fell over 35%. Almost as quickly, the S&P 500 price bounced 20% from the intraday low on March 23^rd to the intraday high on March 26^th. We put some cash to work on March 25^th. However, not all available cash was invested so we can put it to work if we get another decline.

The chart below may be familiar to those of you who have followed my commentary. Stock markets tend to closely follow corporate earnings, as they are a significant representation of corporate value. Stock prices had significantly outpaced earnings expectations over the past year. The drop in stock price has corrected this imbalance and prices currently reflect a drop of around 15% in corporate annual earnings for this year. This level of earnings correction is certainly probable given the pause in economic activity.

The key point to remember is that the market is forward looking. The number of people with coronavirus will continue to rise. As the health situation worsens, shouldn’t the stock market decline further? The answer to this question is “it may not.” The initial market decline was predicting a dire situation. April is likely to be very volatile, but a market recovery will begin before coronavirus numbers peak.

Market prices are currently expecting many businesses to be closed through April 30^th.  That being said, a lot is riding on the next couple of weeks. Everyone is likely to get stronger cabin fever by mid-April, and the coronavirus impact has yet to fully develop. As these emotions peak, Americans will be looking for stronger clarity on when they will return to work. Any decline in uncertainty will help markets stabilize.

Take care. Focus on what is most important and be safe!