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Thoughts on a Jekyll and Hyde Stock Market

Thoughts on a Jekyll and Hyde Stock Market

April 27, 2020

Markets Swing from Predicting Armageddon to Rose Colored Glasses?

OK, as markets stabilized, I took a bit of a break from my almost daily updates during the month of March.  I apologize if it appears that I disappeared for a while, I was just trying to catch up on some work and using the market recovery as an opportunity to breathe.

For those who haven’t been paying attention, stock markets have swung from an Armageddon like record breaking sell off in March to a rip roaring recovery in April.  Has so much changed for the better on the ground? 

I myself am a bit dizzy.  Markets are normally efficient processors of information, with the collective wisdom of millions of buyers providing useful guidance on the value of companies, and for the economy as a whole.  But the collective wisdom of the markets is only as useful as the collective knowledge base that is available to us.  And both during the sell off, and now during the recovery, sound information on which to base future predictions is sorely lacking. 

That means that this stock market recovery we are seeing is not built on a very solid foundation of knowledge.  No one knows what will happen next as the economy attempts to reopen.  Will we return to a severe outbreak?  Will consumers be willing to spend again?  How many companies will fail?  How quickly will people be able to get back to work?  Will we have another shut down in the fall?  Frankly no one knows, and no amount of financial analysis can give us the answer. 

Market sentiment right now is clearly in the optimistic camp.  In fact, despite all the uncertainty, despite the economy virtually shut down for who knows how long, and despite a highly uncertain path to recovery, stocks are now only down 12% since Jan 1, 2020.  Remember that markets fell 19% in the fall of 2018 on nothing worse than the expectation of a half point increase in interest rates.  Is it just me, or does the current market position seem a bit overly optimistic? 

Of course, maybe this optimistic outcome will prove justified.  Maybe new treatments prove successful at limiting the danger posed by the disease.  Maybe we can get back to work while keeping ourselves safe from infection.  Maybe.  As I point out above, no one really can say what happens next. 

But back to the unknowns.  All of what we don’t know right now about the course of the pandemic, the future of the economy, and so on will become known one piece of news at a time.  To the extent that the optimistic view of the market is justified – prices may be supported and we may be able to rally right back to where we were before the pandemic hit.  As if nothing ever happened.  Maybe. 

I think more than likely this will be a longer slog.  I think successes will alternate with disappointments.  I think economic collateral damage will be worse than the market is currently pricing in.  I recognize that I was in fact the one who a month ago was trying to be reassuring, pointing out that we will ultimately come out of this and survive, and I still do believe that.  But I also think that it is important to keep expectations in the realm of reason.  I think it is reasonable to expect that there will be setbacks on the road to recovery, and as these setbacks happen, another stock selloff should not come as a surprise. This is not a prediction – it is simply an acknowledgement that a market built on assumptions in such an uncertain situation is a market built on a very shaky foundation. 

In our portfolio response, while we continue to espouse long term investing, and understand the futility of predicting the future, we are also now holding more cash in portfolios than we normally would.  That risks a somewhat slower recovery than we might otherwise experience if the market continues to race forward, but also provides some protection and ability to redeploy cash should markets take another leg down.  Right now it is prudent to remain a little skeptical.