Volume 2, No. 3, Summer 2020

Still there? Yes. We are here, too, and the coronavirus is still with us, raging.  Month four since the COVID-19 pandemic has reshaped our lives from top to bottom. Here in the U.S., a health disaster unfolds as the south and west are facing record case totals and only now implementing the type of precautions that have become commonplace to those of us in the northeast, where thankfully, the numbers look promising for now.

Outdone by healthcare and other essential workers to be sure, it has been a dramatic time on the front lines of global capital markets. Since the virus began spreading worldwide, markets have been roiled, rallied and roiled and rallied again. Stock markets the world over continue to experience record volatility as future economic performance is now uncertain.  However, as of this writing, many stock markets have shrugged off the economic impacts of the virus and shutdowns, registering only modest declines since the pre-COVID peak.  The technology-heavy NASDAQ market has even achieved a new price record since the short crash. This seems anathema to the news around.

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When listening to market professionals speak about volatility, we often hear the term ‘peak to trough’ to describe a market or a specific stock’s, crash. The term refers to the top price level that was achieved (peak) prior to a rapid decline to the ‘trough’, or low point before settling somewhere in the middle, usually. While the recent peak to trough drop was significant, the most dramatic thing that occurred is the ‘trough to peak’ performance of the stock and bond markets, that is, the recovery in prices.

Why has the market recovered so quickly? There are many theories in this regard. One is that the longer we suffer through the pandemic itself, the closer we get to achieving an effective vaccine and returning to normalcy.  Another is that the unprecedented support of central banks and national governments will be enough to keep the wheels of capitalism greased with all the liquidity needed to get through. Stock prices are technically a measure of long-term future earnings so maybe investors have finally gone truly long-term in their thinking. The recovery is likely a combination of these and many other factors. We often resort to a ‘look out below’ mentality as a natural instinct in a crisis, but our individual sentiments can sometimes, occasionally, be wrong. We tend to underprice the potential for better news and optimism often comes too late, at least to make money on it. Markets are ‘smarter’ or at least more ‘efficient’

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This is not an argument to become more aggressive or increase stock exposure ‘today,’ rather it is an argument on maintaining stock market allocations at reasonable levels through thick and thin. While there may, in fact, be more shutdowns, unemployment, virus cases etc. and the stock market may go back down to uncomfortable levels this year or next, our world will someday return to normal, and valuations along with it. The actual calendar date that this occurs is a mystery to all of us.

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As always, we welcome your questions and comments at any time. Best wishes for an enjoyable summer!

Regards,

Scott

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