Is This for Real?
The United States is reeling. Parts of the country continue to fight off the persistent threat of COVID-19. Never before have so many Americans lost their jobs so quickly. Long simmering social issues are resurfacing across the country as many Americans struggle with the current situation and the increased fragility we are all feeling.
Financial markets seem blissfully unaware. Some call it a new bull market while others call it a bear market rally. Regardless of its label, stocks have sharply rebounded as economies across the globe begin to reopen.
Global stocks have gained over 38% from the low on March 23 but are still 6.5% off their highs reached in mid-February – a financial no-man’s land of sorts. As of June 5th, the MSCI All-Country World Stock Index is only down 3.9% for the year.
Investors’ willingness to take risk has also helped the bond market. The spreads between yields on riskier corporate bonds and high-quality US Treasuries have tightened. Bond yields continue to stay low as the market anticipates the US Federal Reserve to remain ultra-accommodative for some time.
A rational investor might think a nearly 40% recovery in stocks in a matter of months is too much too soon, particularly as millions of jobs have been lost.
So why the disconnect?
Many projections of the virus spread have proven to be worse than the actual experience. We can only speculate on the reasons – messy initial data and assumptions, or the impact of social distancing measures. While the COVID-19 situation has been horrible, some epidemiological projections suggested far worse.
Second, measures taken by government and central banks alleviated investors’ worst fears about another financial crisis. Key pockets of the financial markets are functioning better because of the Fed’s historically immense action.
Third, news of drug developments and a possible vaccine offered hope that the duration of the pandemic may be shortened or less severe.
Last, companies are adapting to the new business environment. Businesses are finding innovative and creative ways to operate with new health guidelines. Companies are leveraging technology in new ways to serve their customers with reduced contact. Innovative and growing companies are always adapting to the evolving marketplace, and in that respect, the pandemic is not different. The speed and intensity of the change required has added uncertainty to the mix, but the need of business to evolve has always been present.
PARALLEL UNIVERSES
Investors are always trying to figure out what the future holds. That is a messy process of consuming relevant information and making a best guess. Today, markets are looking heavily to medical advances for guidance. It’s as if there are two future states of the world. In one state, a vaccine is available, and new drugs mitigate severity of the disease. The second state is one in which a large part of the global population continues to live in fear of the spreading disease.
While these two cases are an oversimplification, it’s not far from reality. In the latter case, economic activity is slow while people avoid making contact. In the former, business continues as usual, as if the outbreak never happened. The challenge for the market is to decide which state we are in.
Markets are constantly discounting what the future economy will look like. It’s tempting to think having a better forecast is the key to successful investing. Fortunately, a crystal ball is not required. The markets reward those who build a portfolio to prepare for a range of possible scenarios – and then stick with it through good times and bad.
You don’t have to know which universe we are in. You just need a solid strategy to weather it.
WHAT IT ALL MEANS
Markets have a long history of getting ahead of the economy. Stock prices generally weaken before the official start date of a recession. Conversely, the financial markets often turn up months before the economy does.
Recoveries also tend to be choppy. After one of the quickest crashes on record, stocks have staged one of the quickest recoveries. It’s important to stay grounded when times are so uncertain. We will keep our clients working towards their goals and keep their money doing the same. Whether the next move is up or down, we will maintain portfolio balance and diversification and help clients stay focused on long-term plans.
Let us know how we can help you.
Contact us at 865-584-1850 or info@proffittgoodson.com
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