The U.S. Federal Reserve meets today to discuss further intervention to rescue an economy and job market embroiled in the worst catastrophe since the Great Depression.
The European Central Bank and Bank of Japan (their region’s version of our Federal Reserve) also meet this week to discuss additional intervention on their respective parts.
These facts and opinions do not support a stock market that is only about 13% off its high (reached on February 19, 2020). The February stock market was arguably overvalued.
It would have taken a 26% decline from the 2/19 high for the market to return to historically average levels (as defined by its price to earnings ratio). We were already in the longest bull market in history (11 years) before COVID-19 appeared. It was due for a correction. It’s still due for a correction, greater than where it currently stands.
The investment industry is fond of pointing out that “past performance is not indicative of future returns”. While that is true, we also know, “history repeats itself”.
Studying significant stock market crashes from the recent past tells us there are often bull market periods within bear markets. In a major market reversal, the peak to trough can be a 50% swing and can take from one to three years to settle, before beginning a prolonged upswing.
The economic damage already done is dramatic. The amount to come could be staggering.
I’m not a market-timer and don’t believe a complete exit of the stock market is a winning strategy. Instead, I prefer using asset allocation to manage portfolio risk. Sometimes we “underweight” an asset class and sometimes we “overweight” one. For example, many portfolios are currently “overweight” in cash but not zero-weight in stocks.
It has become somewhat of a religious argument in the industry. Some think the worst is over and others, that it is yet to come. What puts me in the latter camp is the enormity of recovering a $21 trillion dollar economy to its former level. It feels like an activity over several months or a few years, vs. weeks or a few months. The ultimate answer may hinge on whether the promise of a therapeutic or a vaccine presents itself.
My orientation right now is on the more conservative side. That may not be your orientation, in which case I remain ready to discuss the best path forward for your portfolio.
Here’s to more normal times.
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