Social Distancing is not fun
The stock market has been up sharply over the last two days, and I think it may go a little higher over the next several days into next week, but after that, it could turn back down again.
The playbook that the stock market seems to be using now is similar to the financial crisis. If you recall, stocks recovered in the tail end of 2018 after the banking crisis caused the markets to crash, and it looked like the worst was over. But that did not last very long, the stock market rally quickly faded, and stocks fell to new lows in early 2019.
Although no one can know, it is evident that the worst of the coronavirus epidemic has yet to come, and the economic damage, while still unknown, is predicted to be severe. And, it is likely, no matter what President Trump thinks, that social distancing will be needed for an extended time unless a vaccine can be identified soon. However, analysts expect this could take up to a year at the earliest, which will add to the uncertainty. I am hopeful that next year things will be better and do expect the markets to recover in 2021 based on the research I am getting from reliable sources.
That said, at current prices, it is a good time to invest some cash, and 12 to 24-month returns could be in the double digits. But adding any new money here would require an understanding that an even better opportunity may present itself over the next few months, we do not know. A good strategy would be to spread out new investments over five or six months and average in gradually.
The bottom line, the significant drop in the stock market reflects the adverse effects on the economy because of the Covid-19 pandemic. The question now is whether or not the stock market has overshot on the downside, or will further downward adjustments be required.
Only time will tell, but whatever computer models that drove the stock market down at such a torrid pace seem to be making the assumption that it could take many years to recover from the recession we will soon experience.
We will undoubtedly have a recession, defined as two consecutive quarters of negative corporate earnings, because of the social distancing policies necessitated by the Covid-19 outbreak.
Among the analysts that have been particularly helpful of late have been the team at JP Morgan. According to models JP Morgan is using, this recession is unlikely to be so severe as the Great Depression but more likely will be limited to the next several quarters. They expect medical science will prevail over this virus and, following a peak in virus-related illnesses, economic activity will begin to return to normal, possibly before the end of the year, but more likely sometime next year.
And, as quickly as computerized trading can take the markets down when the tide turns, those same models are likely to adjust in the other direction. The stock market appears risky now because of the correction, but the fact that stock prices are already down so dramatically means the risk of owning stocks is lower now than it was a few months ago when everyone wanted in. In other words, there is not much one can do but remain calm and try to do our best to stay healthy and in communication with family and friends.
We know that not everyone will remain calm. As much as everyone wants in when the markets are going higher, most people are reluctant to invest when the markets are moving lower when the opportunity for long-term gains is highest. Hopefully, most of the worst decline is behind us, but we can't know, and unfortunately, the stock market could fall further in the coming weeks. Remember, you own very high-quality investments that will stand the test of time and that this crisis will pass.
As the situation develops, I will do my best to keep you informed, and I will be looking for an appropriate time to re-balance your portfolios to take advantage of this correction as much as possible.
And, for those who like bargain hunting and speculating in the stock market, I will be sending out ideas for you.