When the markets were skyrocketing to new heights, I reminded readers about the importance of diversification, managing risk and watching valuations. It wasn’t fun to be Sarasota’s “Debbie Downer” for a couple of years, but now the tables are turned. Many investors are as pessimistic about the market as they could ever be. That can lead to a new set of potential investing mistakes.
Just as Greenspan characterized the dot-com bubble as irrational exuberance1, maybe it’s time to consider what the market is ignoring in the midst of pandemic pandemonium. The market has recently set a record for the largest one-week rally since 19742. A pessimistic pundit might call that a dead cat bounce (as in, “Even a dead cat would bounce up if you dropped it from a high enough building.”), but the more passionately we hold a market view, the more critically we should re-examine it in case we’re missing something. I won’t go on the fragile limb of predicting whether and when any of these possibilities will happen. That’s foolish. But, because they can happen, here’s what might turn the markets around.
The fiscal and monetary stimuli begin to work
The Fed’s quick actions might not have prevented the Great Recession, but they certainly shortened its duration and contained some of the damage. The market started rallying sooner than the economy and it just might begin to do so again. This time around, the Fed’s monetary stimuli are coming alongside of unprecedented government spending. Eventually, that liquidity may begin to reappear in higher stock prices.
The pandemic eases soon
There are encouraging signs that social distancing is working3. (let’s keep it up) Though there hasn’t been too much positive news about the broad testing and contact tracing that will allow our country’s population centers to get back to work, that news might be unexpectedly around the corner. A vaccine or treatment might arrive soon. Here’s hoping.
American ingenuity adapts to new conditions
We’re already beginning to see society adapt to these new circumstances. More restaurants deliver. Production for needed medical supplies is ramping up. Americans’ buying habits are evolving. The freedoms of our economy encourage companies to adapt quickly to address customers’ needs. That creates new investment opportunities.
Are the markets are simply undervalued?
It’s difficult to spot a market bubble except in hindsight. That’s also true of a market panic. As I’ve alluded to before, stocks aren’t valued according to what they’ve done in the past. Their value comes from what the market thinks they’ll be worth in the future. Unfortunately, because we’re looking into the future, the so-called true value can’t really be known. Current prices reflect all investors’ collective judgment of the future. Market rallies happen when investors decide en masse that assets are cheaper than they should be.
Is it time to be a Pollyanna? That I can’t answer. But it’s always a good time to keep an open mind and our emotions in check; now perhaps more than ever.
1https://en.wikipedia.org/wiki/Irrational_exuberance
2https://www.wsj.com/articles/global-stock-markets-dow-update-4-7-2020-11586407494