As I write this, the stock market has triggered a trading halt due to the poor opening trades on Monday. This doesn’t happen often, but the idea is to stop the mass-selling that is, in my opinion, often induced by computer trading programs and not by people hitting the “sell button.”
At any rate, the market is trying to re-price stocks based on new information. Obviously, the new coronavirus worry is causing analysts to re-compute targets. There is the reality that some companies may have reduced labor due to sickness (or preventing sickness), so fewer products can be produced and sold, which will slow down the economy. So, there may be a real impact to corporate earnings and global growth.
In my opinion, the market was overbought, as I mentioned in December and January emails. A pullback was likely, regardless of the cause. In this case, the virus did it, and I do think that the recent uncertainty over oil prices, the Democratic primaries, and North Korea missile testing piled on. Hopefully, you took my advice from February’s email and considered how you would react to a market pullback. I know many of you did, as I received calls and emails about revising allocations and creating/updating financial plans.
As we stand today (March 9, 2020), my indicators have gone from overbought to quite oversold. Just as stock prices do not immediately come down when they are overbought, they also don’t immediately come back up when they are oversold. We have not been taking big steps to get into the market recently, although we have done some dollar-cost-averaging and portfolio rebalancing.
I have heard some people say that they cannot recall a time like this in the market, but we’ve had several, including the 4th quarter of 2018 most recently. In that period, the S&P 500 was down nearly 14%, and was down 19% at its worst. For perspective, the S&P 500 is down about 13% in the first quarter of 2020. In early 2016, the S&P 500 was down almost 8% in a little over a week! These corrections, while not fun, really are pretty ordinary, and are they price you pay for trying to get high returns.
There will be adjustments to my model, for sure, but right now, investor sentiment is very washed out. Even assuming more downward adjustments to earnings and growth predictions, stocks still look underpriced. Low-interest rates make stocks look even more attractive, by comparison. Cheap oil prices will lessen the impact of fuel costs for individuals and companies, allowing more money to go back into other products and services. The Federal Reserve is being very accommodative, and the US Dollar has weakened a bit, which should make our exports more affordable to foreign purchasers. So, once the current fear trade is off, there is potential for higher prices. In the short-term, though, fear and greed dominate the action, while in the long-run, stock prices seem to follow corporate earnings.
When price conditions stabilize, we’ll move back into stocks in a more meaningful way. Until then, though, please consider how you are doing with the ups-and-downs. For many of our clients, they understand that it’s just a part of investing in stocks. Over time, the best way to get above-average returns is to take above-average risk. But if you are uncomfortable (losing sleep) over the market, then we need to revisit your allocation to make sure that you are invested properly. If you can handle the ups-and-downs, I think there will be a great opportunity to buy stocks at prices we haven’t seen for the past year or so.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.