After weeks of warping existential emotions, many of us are now settling into the stillness of self-isolation and social distancing.
And as things calm, we inevitably turn to think about practical matters with less than the understandable panic we felt earlier this month. Many of us are, and rightly so, thinking about our 401ks and other investments.
Indeed, I have received calls from friends from around the US and Canada, wanting to know what I have been thinking about and what to do.
So, instead of one on one calls, I decided to share my musings on the near-term outlook for stock markets
Nothing in the past tells can us much about the post Covid19 future
Usually my stock market models are based on employment, inflation, consumption and a host of other such indicators (all very conservative, almost lagging indicators but they work!).
These variables are now mostly useless for predictive purposes. Worse, for the next couple weeks at least, markets will remain in a very dark and turbulent storm of bad news, obscuring any definitive short-term market analysis.
Nonetheless, it is always a good time to gather thoughts and consider when we might see the solid ground that will allow for more reliable assessments of future markets.
My predictions… Not yet! Explanations first
I will make market predictions in a bit (see the bottom of this article if you must), it’s important to lay out the context and reasons for my predictions first.
Before I even begin to explain, I want to start by saying three things.
First, while my past market predictions in The Sustainable Century have all been pretty close to spot on, it doesn’t mean I will be this time around. Humility must always precede certainty.
Second, unless you desperately need money and have exhausted all reasonable avenues to get some cash, don’t, I repeat do not sell your stocks or funds now. Just don’t.
Third, I urge you to contact one or more financial professionals if you have any doubts about the market or what to do with your portfolio. (I have several expert friends you can contact, just let me know).
The only certainty is uncertainty
While great damage has been inflicted on the economy and markets in terrible events of the past — the Great Depression, the Great Recession of 2008, the Asian financial meltdown, the Dot.com bubble, the mortgage and loans bust — the causes and solutions to those crises were determined relatively quickly.
The news over the past several weeks, however, tells us that the horrible human and economic costs to the Covid19 pandemic are not going away soon and will only get more horrible. Worse, unlike other economic crisis, we have little information upon which to reasonably understand market reactions, and by this, I specifically mean how to price risk when someone suddenly throws the emergency brake on an entire economy going 80 miles an hour.
Unanchored to data, facts, or historic experience, investors are adrift in massive waves of uncertainty. This is only compounded by the terribly inconsistent and questionable leadership at the helm of the largest economy in the world.
Steadier hands on the tiller and better understanding of future risks wouldn’t end the economic hurricane, but it could help us survive the deluge. When we get a handle on risk, the markets will start to make sense again.
What do we know?
When will that happen?
No one is sure, that’s what makes it all so uncertain. Despite this, assessing what we know and don’t know can help calm our hearts and minds so we can at least identify signals for when markets might become more predictable.
First, we know from several sources that many folks have developed an immunity to the corona virus. This tells us the virus will eventually be defeated both naturally and via vaccines (developed from this and other knowledge being collected by scientist and doctors). This is good news because it reassures us that a bottom to the market is out there, even if we are unsure when our feet will find it.
Second, we also know that social distancing and virus testing can dramatically reduce both transmission and deadly impact. As our understanding of containment and our willingness to commit to it grows, so will our ability to build a better understanding of and manage health risk. This is a key element in determining some part of market risk and adds to our knowledge of when stocks might ground out.
Third, we know that once we see some measure of contagion control, strategies to get the economy started again will be introduced. This will likely happen once the US and other governments facilitate the development and implementation of efficient and widely available testing. (Why the US has not already requisitioned companies for this task is beyond reason… One may be forgiven if they ponder any of the corruption conspiracies theories that abound, some more plausible than others… like someone’s uncle owning a lab looking for a contract type of theory?).
This is happening in China already – contagion control and getting back to work — so by the time the US and Europe get some control over the situation, assuming they do, there will be loads of Chinese, South Korean, and Taiwanese experiences to learn from. Thank yous, not racist slurs, are in order.
Fourth, unlike fiscal policy (i.e., the government helping out people and companies with direct and indirect financial, regulatory, and tax support), monetary policy is not led by the [fill in your own adjective here] in the White House or in the bickering Houses of Congress, but is run by the independent Federal Reserve. (BTW, the Dems are right to block the GOP proposed $480 billion corporate slush fund and ridiculously little $1,200 to $600 per person direct support).
The Feds have said and consistently shown that they are going to do whatever they can to ensure credit markets remain liquid. The details of why this is important are critical, but not necessary to make my main point here: access to credit will stave off many corporate and consumer bankruptcies and is a necessary ingredient for rebuilding the economy.
The Fed’s actions have limits, but if they have internalized one thing from the 2008 market meltdown, it’s to move quickly, with decision, and with big amounts of money. This is what they are doing.
Fifth, in an economic nightmare like this, to be successful any monetary response must be complemented by a fiscal stimulus. So far, that stimulus looks like it will be a combination of gifts to the corporate sector and cheques to the people. The proportions and details are not quite in as of today. But the markets are positive on the prospect, as they should be.
Many don’t want to see rich CEOs and shareholders of large companies bailed out. But it’s almost impossible to avoid, and much as I hate to say this, we might best wait and use our “bail out leverage” to get our way on sustainability issues later rather than hold the economy hostage today.
Imperfect? Frustrating? I know, and it roasts my socks too. But…the leverage and the irrefutable evidence of decreases to atmospheric carbon resulting from economic lockdowns, we will have after Nov 4 will be greater than anything we’ve ever had before. Patience , as Aristotle said, is bitter, but its fruit is sweet.
Dead (stuffed) Cat Bounce
Somewhere between point two and three above we will see signs of stability in the stock market. But be wary for a dead (stuffed) cat bounce (DsCB – to all my misguided cat loving friends, please pardon the metaphor, it’s not mine, it’s a market term….)
This is where panic selling, or stock selling detached from any real basis of market risk wears out and buying begins on the opposite, equally unanchored-from-reality emotion: relief.
Expect this to happen when the number of new coronavirus cases in the US and Europe clearly begin to trend downward. As it stands, this is not likely to happen until late April, assuming Mr. Trump is not foolish enough to encourage people back to work sooner than is responsible. We must be wary, however, because while the markets hate uncertainty, clowns and crooks love it to their advantage.
Only really great investors can time a DsCB. Stuffed animals make terrible talisman of healthy markets, so don’t get involved with fluffy kitties no matter how cute they may look. Like my dog loving friends say, you can’t trust a cat, even a stuffed one; in this case, because you just never know how high they will bounce. History tells us: its not too far.
When more stocks head up than down by a big margin, that’s when…
Once the investors have a reasonable fact-based estimate on the total damage inflicted on the economy by the virus, uncertainty will begin to subside and buyers will eye-up risk in each sector and for each stock (aka inspect the survivors after the battle).
A key signal the market has become more rational and is definitively moving up, is when the number of stocks with an undeniable upward trend is much larger than those on the opposite path. This typically takes from two to four weeks to show itself. Most seasoned investment professionals understand the point when this is the case and begin to get back into the market.
Don’t worry much about timing the market by investing at the very bottom. Historically, the average “bull market” grows between 86% and 106% from the bottom, so there is plenty of time to be certain the market has stabilized and still enjoy much of the uptick.
The stock market will stabilize in late April but will not be on really solid footing until September, and even then, the climb may be slow. The DsCB will likely be in May/June when the number of US virus cases per day has remained close to near zero for a week or so.
If a vaccine emerges before this, markets will roar back, but there is little way of knowing this (unless, of course, you are on a select insider government committee with special knowledge. But that is a different, felony offence story we need not get in to here. Ahh, but I digress).
The opposite effect could happen, i.e., the markets tanking again, if Trump’s threat to get people back to work prior to when experts tell us its safe, has any substance to it. Watch for stocks to fall if the President chooses to introduce this new uncertainty by putting the health of the economy before the health of the people. If he does, stabilization of the markets could be pushed to the fourth quarter of this year. Maybe.
Later this week or early next, I will speak to the nature of the market and what might be held instore for sustainability gains.
Until then… hold on tight, be safe, and bump elbows with lots of love.
None of the information in this article constitutes investment advice. I urge you to consult a financial professional before making any investment decisions.
If you want to join the tribe of investors wanting to have more sustainable impacts through their porftolio, why not get a copy of my book Invest Like You Give a Damn!